Which Is Worth More: A Ferrari or a Taxi?

Which is worth more, a Ferrari or a taxi?

The logical and obvious answer to this question is the Ferrari, since it is worth thousands of dollars, while the cab may be any vehicle that costs significantly less. We tend to think in a consumerist way, believing that things are worth what they cost. Indeed, this is a way of valuing things, but we need to change this way of thinking because when we refer to value, we relate it to the amount of money that is spent to acquire a good and not to the value that this good can generate.

As soon as you buy a Ferrari, its value begins to decline, and it will continue to decrease in value every day. Despite being considered an asset, its value will gradually diminish over time until it is worth virtually nothing. The Ferrari, by itself, does not produce anything of value; the only thing it generates are costs, expenses, and depreciation. A taxi, in contrast, costs significantly less money, and every single penny that is invested in it will produce more money. Even if the asset loses value, it will still be generating money.  Therefore, in the valuation process, you must also include the profit that the taxi may generate in the future. Here, we assume that the taxi will produce much more money than it costs, therefore, its value is higher.

People often use this mindset to determine whether they should buy something for cash or on credit, using financing or leasing. The analysis they make is that if they buy it in cash, the cost will be, for example, $10, whereas if they buy it on credit, the payment will be $15. Nevertheless, if we apply the aforementioned method with the Ferrari, buying it in cash will cost you $10, but you won't get that money back. On the other hand, if you acquire a taxi through a loan or lease, you would be using someone else's money, and you don't even have to pay it back immediately but rather in the future, over a period of time. You might think, "Sure, but my payment will be higher." This is true, but you will still have your money; in the meantime, you can invest it in something else.

While a Ferrari may have a high market value and be seen as a status symbol, it does not necessarily have the same ability to generate revenue and profit.

The value of the asset in this case is not based on the cost of money, but on its ability to generate income and long-term profits. In the case of a transportation business, such as a taxi service, the ability to generate revenue and profit is based on its ability to provide a safe and reliable transportation service, and to meet the demands and needs of customers.

To calculate the monetary value of an asset, different methods can be used, such as historical cost, market value, or net present value. The historical cost is the original price paid for the asset, while the market value is the current market price. Net present value is the present value of the future cash flows expected to be generated by the asset, discounted by an appropriate interest rate.

When it comes to money, you don't just add it up as you do with numbers, to make investment decisions, you must apply a different formula, which includes not only the final price of the item. You must understand that money may have a higher value depending on how you use it, and money is more valuable in your pocket when it is available to take advantage of other investments than when it is already invested in other assets. Therefore, it is important to consider all this when deciding whether to obtain credit, lease or buy it with cash.

As business leaders, the decisions we make impact the business and its future. And one of the most important areas in decision-making is managing our company's cash flow. Cash flow is clearly necessary; we need money in the bank account to pay salaries, make the business run, ensure business continuity, but beyond all of that, the most important reason to have cash flow is to be ready to seize opportunities.

In times of crisis, that's when the most opportunities arise. It's when you can negotiate better deals with suppliers, buy that machine or equipment at discounted prices, buy out your competitor, open branches or points of sale when the competition is frozen or being conservative. That's why putting your money into a Ferrari from a business point of view will always be a mistake.

You can put your cash flow to work for you before spending it. You can invest in different vehicles, in different things — stocks, bonds, real estate, mutual funds, investment funds, currencies, businesses, or even alternative things like crowdfunding or collective funding and cryptocurrencies — but when you invest, you're always looking for your money to generate more money.

So, what should I buy?  A taxi or a Ferrari?