How the least-likely person to purchase a Model S became an owner
Note: Given the continued high interest in this cost model, and the upcoming Model 3 launch,
I'll be updating this analysis for the Model 3 as more information comes in.
This is my story about how I ended up purchasing a Tesla Model S. No snazzy car photos - not trying to sell you on the beauty of the car, there are plenty of websites for that. This site is about the economics of purchasing and owning a Tesla. If you're looking for my cost of ownership model, skip to the bottom for the link.
Update: There's a new result! electriclove on Hacker News found a bug in one of the formulas. The Ody PV line was adding in fuel costs from another car's row. I've updated the formula, which changes the results, which I discuss below at bottom under the Epilogue. I also added in an extra $1200 every 3rd year for the Tesla for tires.
My wife and I finally reached the point where we realized the Odyssey was overkill. We had 2 kids with no plans for a 3rd, and the car had always felt big. It was time to change cars.
I'd only purchased 3 cars before in my life. A Toyota Camry, that I drove for 12 years. (My mom begged me to get a Prelude instead, worried that the Camry was too boring for a 22-year-old.) A Honda Odyssey, that we had owned for 6 years. And a Nissan Leaf, that we had owned for 3 years. As you can tell, when it comes to cars, I am maybe overly practical.
We started researching and test driving cars. I started by drawing a wide circle, adding in some fun cars along with the practical. I'd always liked the look of the BMW 3-series wagon, and wagons in general, so we started with the 328i and 328d wagon, recently refreshed for 2014. We also looked at the Benz E350 wagon b/c of the practical rear-facing seats, the Outback and Forester for AWD and reliability, and the BMW X3 for AWD and sportiness.
But there was one car we didn't look at: the Tesla Model S.
In fact, up until a few months ago, I was convinced that I was the last person who was going to buy a Tesla Model S. The car was undeniably beautiful and impressive. But it was ostentatious. Too wide. Not versatile enough for long road trips.
Most importantly, it was too expensive. Why would I spend $85K on a Tesla when I could buy nearly any other Japanese car for less, or even a BMW, Audi, or Benz?
Then my brother sent me - among many other links - this video. I was amazed. And for the next 6 weeks, I read up on anything and everything Tesla. TeslaMotors.com. TeslaMotorsClub.com. lolachampcar on TMC. TED.com. Annual reports. Investor presentations.
Finally, I decided I had to test drive the car. My wife and I did 3 test drives. First, I test drove an S60. Then, my wife drove an S85. Finally, I drove P85+. When I floored it outside the Tesla Fremont store, it was an out-of-body experience.
I came around on width (at 77", I could still argue it was 2" narrower than our Ody), AWD (because of this video and related discussions on TMC), and versatility (I concluded I could get to Lake Siskiyou, Lake Tahoe, Monterey, Pismo Beach, Yosemite, Sequoia, LA, and San Diego on the current supercharger network that would only improve with time).
Still, the car was too expensive.
Then one day, I did a Google search for [Tesla cost of ownership] and similar terms. I found a few threads and spreadsheets, but none that I liked. They didn't take into account the time value of money and depreciation. So I decided to make my own model.
I went onto Edmunds.com and looked at their cost of ownership numbers for internal combustion engine (ICE) cars. Then I built a net present value (NPV) model that included 4 main factors: purchase price, fuel cost, maintenance cost, and depreciation. I felt NPV was important, because a dollar today is worth more than a dollar four years from now. I can put that dollar in the bank and earn interest on it. I also felt that fuel and maintenance were important because they were such large parts of the total cost of owning a car. And I wanted to include depreciation so that I could adjust the model if I decided to sell it sooner than eight years (the time frame I used).
When I was done, I looked at the results and was disappointed. I was certain I'd made a mistake. As expected, several of the other car models we had been shopping for were less expensive. The RAV4 EV, which we had just purchased, decimated the pack. (That's what you get when Toyota essentially pays you to take the car off their hands. Maybe I'll write more about that later.) The Subarus also did well.
But there was a problem: The BMWs, Benzs, and Volvo V60 either fared the same or, more often, worse than the Tesla Model S. And then there was the real shocker:
The Tesla Model S beat out the Honda Odyssey.
Before I go any further, some caveats about my analysis. (You can read more on The Model tab of this site.)
First, I built an accounting model, not a cash flow model. I wasn't sure at that time whether I was going to purchase outright or finance, so I left that out. Later on, a friend, Travis, built out a cash flow model, which I discuss below.
Second, I made a lot of assumptions. The model is very sensitive to depreciation. The Model S is fairly new, and resale values are insanely high. So we looked at Roadster values, thought about wear, tear, and battery replacement scenarios, and tried to get to a common sense number for how much a car would go for. How much would I pay for a 2006 model year car, today in 2014?
Third, I also left out some stuff. For instance, I left out insurance, because it's particular to driving history (and because I was lazy). I was also too lazy to try to translate safety ratings, HOV lane access, cargo space, and other features into a dollar figure.
Convinced I'd made a mistake, I asked some friends to take a look. I sent it to another Harvard Business School alum (and finance director at a large tech company), a former Bain consultant with a PhD in Physics, a Haas MBA grad who owns and operates several small businesses, my brother (DaveT on TeslaMotorsClub.com), and 5-10 other really smart people.
Over the next two weeks, they asked a lot of questions and made some suggestions, and I updated the model to reflect their feedback. Finally, I looked at the results again. The Model S still soundly beat all of the luxury models, and even the Odyssey.
At this point, I had to make a decision. My wife wanted her husband back and gave me an ultimatum. Buy the car or don't buy the car - just do it now. She was not entertained that I was able to talk about cars ad nauseum over breakfast, dinner, and at bedtime.
So at 2am one evening, I sat back and asked myself, How would I explain this to someone sitting next to me on the plane? I'm a firm believer that if you can't explain something simply, you don't understand it very well.
And it came down to this:
The Model S carries about $25-30K more in depreciation vs. an Ody, but you save $20-25K on gas
We purchased our Model S in March, and sold our Ody and Leaf this month (April).
Since I purchased the car, I've had a lot of people ask me how I decided upon it (perhaps because it's a bit divergent from my past car purchasing history). There are a lot of other factors that came into play that I didn't talk about here. Things like safety (my brother met the person in this story) and car tech played a role. But the biggest factor was the economics.
I've shared the model with some friends, and it's stimulated a lot of discussion. One friend (the consultant/physicist) "fixed it" (his words) to reflect cash flows. In that scenario, the Ody beats out the Model S by $4K over eight years, due to the effects of the time value of money on financing payments and depreciation. The following week, he ordered a Model S. (I've included his worksheet in the model.)
This experience has not only influenced what car we drive today, but has also changed my view of where the automotive industry is going in the future. It has also changed my perspective on Tesla as a company, as well.
Perhaps this might be useful to you, as well - in which case, here's the spreadsheet.
I created this website two days ago, and during that time, have witnessed 100s of comments on Hacker News, TMC, Twitter, and more. In the middle of all that, electriclove on Hacker News found an important bug in the model: The Ody PV line was adding in fuel costs from another car. (This, IMHO, highlights how valuable the Internet is for discourse and fact checking.) I also added in an extra $1200 every 3rd year to the Tesla for tires. I updated the model and the result is as follows:
The end result is greater parity between the depreciation and cash flow models; and the edge goes to the Honda Odyssey by $5K, or about $600/yr over eight years.
If I had more time, I might try to quantify the value of the safety edge for the Tesla (Travis calculated this to be about $500/yr), HOV lane access, or other features. In the meantime, I checked the formulas on the other cars - they appear to be correct, as does the cash flow model. However, I continue to invite folks to continue to look at and provide feedback on the model.