DEPRECIATION OF ASSETS

Many business owners and managers are aware that is very important to correctly price their products and services, CRM, process-based operations, standardization, PDCA, quality assurance etc., but are negligent when the subject is the depreciation of assets, noting too late, that the renewal of its fleet will be costly.

Certainly, other factors can, or should, be considered for fleet renewal, but one of the most important, in determining the right time to do it, is the calculation of the depreciation, rarely considered in strategic planning.

In fact, in another article of this blog, I described how to calculate a selling price, and avoid wasting your money. The depreciation value represents cost, and should be considered. But what is the depreciation?

Depreciation is the loss of values ​​of the assets. This devaluation occurs because the wear on these assets, or loss of utility due by their use, action of nature, or obsolescence, which occur over the years. If these assets are the main sources of revenue, as are the vehicles for a car rental company, then the depreciation should be computed and treated carefully by entrepreneurs and managers.

There are several methods to calculate the amount of depreciation, such as: 

• Linear
• By use 
• Accelerated

The linear method is the most widely used, especially in accounting. However, the "Accelerated Method"  and "By Use" are recommended when there are factors or characteristics that will accelerate the process of devaluation, being more common in productive processes, but they should be seriously considered by all car rental companies for their strategic decisions.

Let's calculate the depreciation of a vehicle, using the Linear method. We must determine the  Depreciation Rate, a constant, on the Capital Cost, which is computed considering the lifetime of the asset.

• Depreciation Rate (%):
• Period of wear / obsolescence: 5 years, which corresponds to 60 months (5 x 12)
• Rate of wear / obsolescence total: 100%
• Rate = 100% / 60 months = 1.6667%
• Monthly Depreciation:
• Capital cost of the vehicle: $30,000
• Value = $ 30,000 x 1.6667% = $501.01    

The monthly amount of depreciation calculated above, $500.01, must be added to other vehicle costs, so you can calculate the sales price/rent per day or hour. Example: 

1. Cost per day: $ 500.01 / 30 days = $16.67/day
2. Cost per productive hour: $ 500.01 / 30 days / 8 hours = $2.08/hour

Theoretically such a vehicle should be replaced within a maximum of 60 months. Otherwise, if we consider that in a rental car operation, customers lose interest in older cars, we could determine, using statistical analysis, the accelerating rate of devaluation, which may be used in one of the above methods. Example:

• Depreciation Rate (%):
• Period of wear / obsolescence: 5 years, which corresponds to 60 months (5 x 12)
• Rate of wear / obsolescence total: 100%
• Index of accelerated wear: 2.5 (life will be reduced to 24 months) 
• Rate: 100% / 60 months = 1.6667%
• Accelerated rate:  1.6667 x 2.5 = 4.1668%                          
• Monthly Depreciation:
• Capital cost of the vehicle: $30,000
• Value = $ 30,000 x 4.1668% = $1,250.04

Therefore, the value of the monthly depreciation accelerated, $1,250.04, should be added to vehicle costs, so: 

1. Cost per day: $ 1,250.04 / 30 days = $41.67/day
2. Cost per productive hour: $ 1,250.04 / 30 days / 8 hours = $5.21/hour

Do you want to look more closely at the depreciation calculation for your vehicles? If so, CARS+, the leading management system for car rentals for global brands and independents, will help you!