The formula
value = price × (1 − initial drop) × (1 − annual rate)^years
Where it comes from
A car loses value exponentially, not linearly: each year it loses a percentage of what it is worth, not of the original price. That is why the first years are the expensive ones and why the curve flattens noticeably from the seventh or eighth.
How to work it out by hand
- Apply the initial drop at the moment of registration
- Multiply by one minus the annual rate, raised to the years since
- Subtract that value from the purchase price to see the loss
What is worth knowing
Depreciation is almost always the biggest cost of running a car, well above fuel, and yet it is the one least looked at because no bill arrives for it. A car bought at 25,000 that is worth 7,000 after five years has cost 3,600 a year in lost value alone: about 10 a day without being driven. Buying used at two or three years old skips exactly the steepest part of the curve.