We have often been faced with the decision to buy a new product or fix the one we have. But how do you know which option will leave more cash in our pockets.
Throwing money at a bad product could get quite expensive. At the same time, just because a product is broken does not mean replacing it will be the better cost savings. To make a good decision you will need to know what costs are relevant to your decision and the opportunity cost of your decision.
When making a decision between multiple alternatives, the only factors you should consider are the factors that make a difference between the alternatives. Cost that will be the same regardless of what option you take are not relevant. For example, the cash you used to buy the vehicle or any recent upgrades are irrelevant to the decision. These are sunk cost and no matter what you do, you cannot change this cost. Taking sunk cost into consideration will cause you to make the more expensive future decision.
Find below a workbook to help you make the fix or replace decision.
Needed Information for your analysis
- The life time of the new product or asset: How long do you expect to keep the new asset
- The average cost of maintaining the old asset: This will include annual maintenance like oil changes, replacing parts, etc.
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The cost of maintaining the new asset: Newer assets tend to have lesser cost of maintenance. There could also be increased energy savings, improved gas mileage, etc.
- Any savings should be added and any expenses should be subtracted.
- For example, if you will save $500 a month on electric bills but spend $50 on supplies, your net monthly maintenance cost is a positive $450.
- If no savings are expected, then your maintenance cost should be a negative -$50.
- This number is hard to nail down but do your due diligence to get as close to a good number as possible. In this day and age, it is easy to find information from other consumers who use the same product. So, do your due diligence rather than assuming your new purchase will save you money. If you end up spending the same as you did in maintaining your old product, then keeping the old will probably make more sense.
- The difference between your cost of maintaining the new and the old is your annual cost savings.
- Enter the cost to repair the product – this is the cost to fix it now to get it to a working condition. Future estimated cost of maintaining the product should be added with the annual maintenance cost.
- Enter any cash you will receive from selling the asset
- Enter the purchase price of the new asset
- Enter the opportunity cost of the cash you use to purchase the new asset. For example, you could have an investment deal that will earn you 10% on the same cash. This should be considered as it is relevant to the decision.
After you enter your data, you get the following analysis:
The final decision to fix or replace is an individual one. There could be other factors that are personal to the decision maker which will make one choose otherwise.