Question

How does depreciation affect the cost of owning a car over a period of 5 years

Answer 1

Due to depreciation, the value of your car goes from 100% when you buy it to nearly 40% after 5 years.

Step-by-step explanation:

Depreciation means the reduction in the value of something you have with time. If you buy a car for $40,000 in 2020 and want to sell it in 2025, you will have to sell it for something near $16,000. This reduction in price is because of you owning the car and using it for that period.

After you buying a car and owning it for a year, your car's value depreciates about 20% which means your car is now worth 80% (100%-20%) of what it cost when you brought it. After owning the car for a year, the value depreciates approximately 10% every year. So for another 4 years, your value decreases another 40% (4 years x 10% per year).

To summarize, the first year the car value depreciates by 20% followed by 4 years of 10% each which is 40%. So in total after 5 years, your car loses nearly 60% of its value due to depreciation. A car brought in 2020 for $40,000 will depreciate 60% and will be valued at nearly $16,000 during 2025.