ROI / IRR / CAGR - Finance Industry ?

[cinderblock]

Will ROI and IRR be static irrespective of number of vehicles being increased ?
Yes. Unless you can charge more interest rate because you have a dominant position in the market.

Can you please share the working / advise on the calcualtion methodolgy.
IRR is the same calculation like you used in excel

Can you please highlight the difference between the IRR / ROI / CAGR with respect to this example.
IRR assumes you can redeploy your capital received through EMI each month at the same IRR which usually does not happen. ROI is one time return with no redeployment of capital until 3 years

I am trying to compare it with "when HDFC Bank stock becomes 55 times in 17 years" it is 26% CAGR.
Your CAGR in earnings can be 64%. But are you sure you can increase the number of vehicles by 50% YOY for 20 years?

Ans in bold

 

[cinderblock]

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[aces27]

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1. How did you get 14%
a) 84240 / 180000 = 46.8 ; 46.8/3 = 15.6%
b) 180000 * 1.135^3 = 264,000

Either 13.5% or 15.6% , and how come it is less than 1.3*12 = 15.6


Case 1 :
No Increase in vehciles.
ROI : ?
IRR : ?
CAGR : ?


Case 2 : Increase in vehicles at 14% per annum
ROI : ?
IRR : ?
CAGR : ?


Case 2 : Increase in vehicles at 30% per annum
ROI : ?
IRR : ?
CAGR : ?



Also , I generate 7340 x 75 = 550,500 cash per month
I can increase 3 x 12 per year. 36/75 = 50% more.
As you said , my base increases. to get this 68% CAGR.
But since I am only investing my generated profits , no additional cash from Pocket.
Yet my CAGR is exceeding IRR ?
Why is the IRR not able to count the increase in vehciles by itself. The 5.5 Lacs per month should creat 3 more vehicles per month.
The same 5.5 Lacs represents more than 14% increase in vehicle count.

Increasing vehicle count by 30% for 10-12 years is acheivable easily.
So , 1.3*1.14 = 1.48 ; 48% CAGR ? for 10-12 years. Thats still great !
This is a real life existing business. And Finance is against Co-lateral.

 

[cinderblock]

1. How did you get 14%
a) 84240 / 180000 = 46.8 ; 46.8/3 = 15.6%
b) 180000 * 1.135^3 = 264,000

Either 13.5% or 15.6% , and how come it is less than 1.3*12 = 15.6

It's 46% for 3 years.

If you use SI, then it is 46 / 3 = 15%

If you use compound interest it is (1.46)^0.33333 = 13.5

Rest later. Meeting soon. By the way, thanks for helping brush up some concepts. Cheers!

 

[aces27]

It's 46% for 3 years.

If you use SI, then it is 46 / 3 = 15%

If you use compound interest it is (1.46)^0.33333 = 13.5

Rest later. Meeting soon. By the way, thanks for helping brush up some concepts. Cheers!

Thanks for your time.
I hope that I didnt trouble your schedule. But really wanted to clear my head on this.
Am thanking you once again for further pestering. Just a little more. :-D . So that I can have a fully detailed and summarized answer.
Time to Jot down in Microsoft Word :-D.

Please do fill up the three cases described above , when you have time.
I am not convinced that CAGR can be higher than 30%.


And , once we are clear about the numbers IRR , ROI , CAGR in each case.
Lets Make a comparison with Other businesses and Equity Investments over 15 years.

 

[cinderblock]

So, I spoke to one of the junior corp fin analyst because he was the only one who had time to spare

Assuming you are not using any additional capital,

1. You say 15% (1.3*12). But based on EMI, the actual interest rate charged to customers is 28% (you sure they don't have other recourse?? ). This is IRR

2. If you deploy all your EMI back in the business the max CAGR = IRR=28%

3. If you do not deploy EMI back in business all you earn is ROI =CAGR= 15%

4. If you plough back anywhere between 0% and 50% (36/75 like in previous post) of EMI your CAGR will be between 15% and 28%. The hard way is to calculate the monthly cashflows and then use IRR method. The easy way is to straight line between (0, 50) and (15,28) and calculate CAGR for 14% and 30% redeployment - meaning ~19% and 23% respectively.

Case 1 :
No Increase in vehciles.
ROI : 15%
IRR : -------
CAGR : 15%


Case 2 : Increase in vehicles at 14% per annum
ROI : 15% but it makes more sense to use CAGR
IRR : --------
CAGR : 19%


Case 2 : Increase in vehicles at 30% per annum
ROI : --------
IRR : ----------
CAGR : 23%

 

[UberMachine]

Thanks for your time.
I hope that I didnt trouble your schedule. But really wanted to clear my head on this.
Am thanking you once again for further pestering. Just a little more. :-D . So that I can have a fully detailed and summarized answer.
Time to Jot down in Microsoft Word :-D.

Please do fill up the three cases described above , when you have time.
I am not convinced that CAGR can be higher than 30%.

And , once we are clear about the numbers IRR , ROI , CAGR in each case.
Lets Make a comparison with Other businesses and Equity Investments over 15 years.

CAGR would always be 30.5% for this business.
Its the amount of reinvestment that determines both your future value and rate for return.
You could see the attachment for more details. I calculated for one vehicle and assume you can investment could be always be reinvested (no idle cash). I have made a lot of built-in assumptions

Since this is a real business, I assume you are being paid equal monthly instalments for the amount you invest.
So, in the first case you invest Rs.180000 and get back 7340*36=264240
Calculating CAGR in this case, comes to just 13.65% per annum.

So @cinderblock is correct in his approximations.
Better to work out some sensitivity analysis and cover some corner cases to get a better picture

 

[aces27]

CAGR would always be 30.5% for this business.
Its the amount of reinvestment that determines both your future value and rate for return.
You could see the attachment for more details. I calculated for one vehicle and assume you can investment could be always be reinvested (no idle cash). I have made a lot of built-in assumptions

Since this is a real business, I assume you are being paid equal monthly instalments for the amount you invest.
So, in the first case you invest Rs.180000 and get back 7340*36=264240
Calculating CAGR in this case, comes to just 13.65% per annum.

So @cinderblock is correct in his approximations.
Better to work out some sensitivity analysis and cover some corner cases to get a better picture

Hi ,

Thanks for theanswers @cinderblock ,
Yup , The answer is 13.5% if there is no reinvestment at all.
And upto 30% , if all proceeds are reinvested.

Can you add another column , that shows the number of vehicles under finance every year. @UberMachine
Like in case we start with 1,35,00,000 we have 75 vehicles. Monthly amount collected is around 5 Lacs , so three more autos can be financed.

That makes it very interesting as a business.
As initially it is very easy to reinvest all , and even if we can do this for 5-7 years and acheive the 30%.
We can make 1 crore into 5 crore in 6 years.
As upto 500 - 700 Autos is manageable. Not beyond that.
And as we decrease the reinvestment , considering lack of oppurtunity , it still will bring us down to say 17-23%.
Still not bad. Thats how much Industries/Trading businesses give. This is against Collateral hence pretty safe as well.
Only operational costs and some ocassional defaults to manage.

 

[cinderblock]

So, as I was reading the previous message by Uber, I just had a mini Eureka moment.

There is a one line answer to your problem: CAGR = ROI / (1-g)

g is the growth rate.

If you are mathematically inclined, I will be happy to derive the equation for you. The proof itself is 3 lines

 

[aces27]

So, as I was reading the previous message by Uber, I just had a mini Eureka moment.

There is a one line answer to your problem: CAGR = ROI / (1-g)

g is the growth rate.

If you are mathematically inclined, I will be happy to derive the equation for you. The proof itself is 3 lines

Sure ,
Please do. Its always good to get some knowledge and clear my head between the difference between CAGR and ROI.