So you are frugal, and understand that driving to work is not an exercise in style. Therefore you hope for your car to get to 250,000 miles. However, parts start to break down at 150,000 miles and you are hit with a couple of repairs within the last two years of $2,000 and $5,000 respectively for a car you bought for $25,000 in 2010.
Now there is a new repair bill coming in, and if you make the calculus of investing the difference between $25,000 you would be spending in a new car minus the cost of the expected repairs in a 5-year period you expect to keep the current car if you repair it (for example $8,000, and assuming it is paid upfront today) at a 6 percent yield (say, stock market): the present value of the investment will be -$17,000 and the future value of that investment will be ~$23,000 in 5 years, for a gain of $6,000.
If this way of thinking is sound, there is no question that keeping the car, and repairing is the right choice. Further, if you buy a new car now, as opposed to in 5 years, that new car will start siphoning savings in repairs 5 years earlier also.
The counterargument is that I should already be factoring in the $7,000 spent in recent repairs, and although this is money already spent, I could make the same argument every day, even if I was hit with a similar repair every day in the next few months. So there has to be a different way to calculate the difference.
I could just calculate the future value of $25,000 invested in stocks at an expected return of 6 percent (conservative or not - I don't know - but there is no bank interest anymore, so just humor me) for 5 years as $33,000, and say that the break-even figure is $8,000, but of course, this is future money - not present.
So what is the right way to calculate whether to dump the car or repair it?
