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1.6: The Car Case "My Uncle's Car"

The car case "My uncle's car"

Wishing to provide a basic understanding of how costs should be treated, as well as an understanding of the obligation to treat costs differently in different situations, the car case "My Uncle's Car" is introduced. A car example has been described in earlier examples, but below the case is described more thoroughly:

As I, S0ren Hansen am an HA-student, I cannot afford my own car, which is why I now and then borrow my uncle's car. He owns a five-year-old VW Golf worth about 100,000 DKK, which I can borrow if I cover all his costs. As he is an economist and wishes to train my economic understanding, he asked me to analyze what "all costs" include. The deal is apparently crystal clear - but there is room for interpretation which can result in room for disagreement, as we will see later.

The deal was: "all costs" my uncle incurred by lending me his car. In order to clarify this term, I would like to start by drawing up my uncle's costs of owning and driving the car. The costs10 below are calculated on basis of a yearly mileage of 15,000 km, an average fuel consumption of 10 km/liter and a fuel price of 8 DKK/liter.

My uncles costs

Fixed costs, independent of mileage (in DKK/year):

o Insurance (liability, comprehensive, fire, accident, etc.) 12,565

The premium depends on level at to which the car is insured, this entry will probably will change over time, based on "good customer" status or the length of time my uncle has been insured, as well as the number of accidents reported. My uncle is elite class driver.

o Vehicle excise duty 2,260

o FDM and Danish Auto Help 775

o Carwash, parking etc. 2,164

o Interest 5,022

Interest is calculated as follows:

((opening value 100,000 + closing value 90,500) / 2) multiplied by the interest rate 5,27%

o Loss of value over time 6,000

o Inspection 200 The car is inspected every second year for 400 kr. which is 200 each year. It is assumed that the costs of repair in connection with the inspection is included in the maintenance costs.

o Total 29,077

o DKK per kilometer at 15,000 km pr year 1.94 Variable costs, increase and decrease with mileage (in DKK/year)

o Fuel 12,000

o Tires 1,940

It is assumed that my uncle changes tires after 30,000 km and that the total costs of these is 3,880 DKK, i.e. 1,940 kr./year (at 15,000 km.)

o Service check-up 2,400 It is assumed that a service check-up is carried out for after 7,500 km and that the costs are 1,200 each time.

o Maintenance (wear and tear repairs) 6,749

o Loss of value due to mileage, at 15,000 km. 23.3 0re/km. 3,500

o Total 26,589

DKK per kilometer at 15,000 km. 1.77

Relevant factors

With regards to the question about how much it should cost me to borrow my uncle's car, several factors must be considered, including the following:

o The time horizon, owing to the fact that there is a decisive concerning fixed costs, whether I borrow the car for two hours or three months, regardless of driving.

o The mileage is of course very important as it is this factor upon which the variable costs are highly dependent.

o My uncle's situation concerning the car, as the costs are to be treated differently whether he would be using the car himself, or if he is on vacation, or can rent it out to a friend.

o "Coming costs," which are the extra costs taken on by my uncle as a consequence of my borrowing his car; e.g. a possible change in the insurance policy if I borrow the car frequently, depending on his current policy.

o Risk supplement, owing to the fact that if I borrow the car there may be greater risk of the car getting damaged than when it is in garage.

o Situations where my uncle wants the car no matter what, based on his own needs it.

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