Role of Effective Model to Assure Price of Used Cars

Abstract

Predicting the price of used cars is both an important and interesting problem. According to data obtained from the National Transport Authority, the number of cars registered between 2003 and 2013 has witnessed a spectacular increase of 234%. From 68, 524 cars registered in 2003, this number has now reached 160, 701. With difficult economic conditions, it is likely that sales of second-hand imported (reconditioned) cars and used cars will increase. It is reported that the sales of new cars have registered a decrease of 8% in 2013. In many developed countries, it is common to lease a car rather than buying it outright. A lease is a binding contract between a buyer and a seller (or a third party – usually a bank, insurance firm or other financial institutions) in which the buyer must pay fixed installments for a predefined number of months/years to the seller/financier. After the lease period is over, the buyer has the possibility to buy the car at its residual value, i.e. its expected resale value. Thus, it is of commercial interest to 754 Sameerchand Pudaruth sellers/financers to be able to predict the salvage value (residual value) of cars with accuracy. If the residual value is under-estimated by the seller/financer at the beginning, the instalments will be higher for the clients who will certainly then opt for another seller/financer. If the residual value is overestimated, the instalments will be lower for the clients but then the seller/financer may have much difficulty at selling these high-priced used cars at this over-estimated residual value. Thus, we can see that estimating the price of used cars is of very high commercial importance as well. Manufacturers’ from Germany made a loss of 1 billion Euros in their USA market because of mis- calculating the residual value of leased cars . Most individuals in Mauritius who buy new cars are also very apprehensive about the resale value of their cars after a certain number of years when they will possibly sell it in the used cars market. Predicting the resale value of a car is not a simple task. It is trite knowledge that the value of used cars depends on a number of factors. The most important ones are usually the age of the car, its make (and model), the origin of the car (the original country of the manufacturer), its mileage (the number of kilometers it has run) and its horsepower.