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So, what are your options worth?

Date: 06 June 2007

John Mahoney delves into the art of RVs and the potential pitfalls of picking the wrong options

Gauging residual values has been described as part-art, part-science, a healthy dose of experience, blind luck and one almighty headache for manufacturers.

RVs can be little understood despite being by far the greatest cost to businesses running a fleet. Whether directly on disposal or indirectly through rentals, in one way or another it's your business that foots the loss.

Many also presume RVs are fixed by the residual gods and there's little they can do to influence how much their company loses. Wrong.

Car manufacturers can spend up to a billion pounds developing a new model, and RVs will have been considered from the very first day a designer puts laser pointer to virtual draught board, with RV experts, the equivalent of automotive soothsayers, consulted long before a car is ready for launch.

They can have a huge influence in a vehicle's development, ensuring every element that factors into calculating residuals has been accounted for and managed. Normally this can involve simple things such as avoiding a fuchsia pink colour scheme on a luxury car, to urging a manufacturer to cough up for sexy alloys.

Once the laborious spec process is over the heated discussions between the two parties then begin, with the carmaker claiming its new car is so much more superior to the old it will command more money than before.

Even after RVs have been set they are closely monitored when cars are disposed of, and uplifted and tweaked if necessary.

Load it and lose?

Let's say, for example, the new Ford Mondeo, a very fine car indeed, has a residual value of 31%. Most fleet managers would expect back 31% of the value they invested after three years, but they'd be wrong. Crucially, experts such as Cap, Glass's, IDS and Emmox provide guides for expected resale that can be heavily impacted on the specification you or your staff may choose. In reality, the value can be both boosted or lowered by the residual value of the optional extras you tick the box on. Load it full of options that command less than the 31% RV benchmark and expect values to tumble.

No cost can cost

Auction specialist Manheim's Rob Barr stresses the point: "Companies must be mindful that the value of options must be greater than the drop-off in the value of the vehicle, otherwise it runs the risk of costing the business twice." He gives the example of where even a no-cost option can cost the company dear.

"A special order, executive BMW with a no-cost manual gearbox can be a nightmare for the market place. Come disposal you can kiss goodbye to two or even three grand over the equivalent standard auto."

It's a sobering reminder that even when your employees are not spending extra money that they risk ruining residuals and sending the overall whole-life cost per miles through the roof.