# Net Present Value and DVC

Discussion in 'Purchasing DVC' started by dmunsil, Jun 6, 2013.

1. ### dmunsilDisney Uber-Nerd

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Warning: you may want to get some coffee. This is another long brain dump from a man who has been driven to distraction by his inability to actually use his DVC membership.

I've been calculating the Net Present Value (NPV) of a DVC membership, assuming that you use all your points, that the cash price of DVC rooms keeps going up at some rate, that the dues keep going up at some rate, and factoring in the time value of money, in other words that in order to get something worth \$X at some point in the future, you should be willing to pay a smaller value, \$Y, where Y and X are related by the assumed time value of money. The time value of money is basically the interest rate you believe you could get for your money.

So you can see a DVC membership as buying a stream of annual discounts, where the amount of the discount is the difference between what you pay for your points (in dues) and what the rooms you could buy with those points would cost in cash. Then you extend that discount out to the length of the contract (29 years for BWV, 47 years for BLT, etc.), and calculate the Net Present Value of all of those discounts and add them up. You increase the dues by a reasonable value each year, and the cash prices by a reasonable value each year, and pick a time value for money that isn't crazy.

The net result is that even at direct prices, DVC looks like a good deal. At resale prices it looks like a fantastic steal. This is even if you use really conservative numbers for time value of money and pessimistic numbers for dues and cash room inflation.

Personally, I think dues and cash room prices will go up at about the same rate, and I think they will eventually fall into line with inflation. Unfortunately, "eventually" could be a very long time. Cash room inflation and dues inflation have been higher than core inflation for years, and they could stay higher than core inflation for many many years. Still, 3% annual inflation seemed like a reasonable figure. And time value of money of 4.5% seems defensible. A bond index fund, for example, would average more than that, and rarely return less for a one-year period.

The interesting thing about all this is that if you plug in the numbers and build out the chart of what a contract is "worth" the value goes up for a lot of years before going down again until obviously on the last year it's worth exactly what that year's discount comes out to be. That had me scratching my head until I realized that it's only going up in nominal dollars, not inflation adjusted dollars.

For example, my assumptions say that 300 points of BLT this year are worth \$104,046. Next year those same 300 points are worth \$105,563. The value actually peaks in 2033, at \$123,163. After that it goes down every year until in the final year it's worth \$11,796, which is what I calculate the difference between dues on 300 points will cost and what the equivalent rooms would cost in cash.

However, if we imagine 2% inflation, that "peak" value of \$123,163 has the buying power of \$84,543 in 2013 dollars. So really, the true value of the contract isn't going up, it just feels like it is. I think this is part of what we're seeing with the price inflation both from Disney and from the resale market. The price is going up in nominal dollars, but in inflation adjusted dollars, it's rising much more slowly. Again, I would guess direct DVC prices will in the long run inflate about as fast as dues and cash rooms. The long run can be very very long, though.

Considering that the current price of 300 points of BLT buying direct are \$49,500 at Disney's \$165/pt and \$34,500 at a high-ish resale price of \$115/pt, this analysis suggests that DVC is a good deal.

So here's a counterintuitive thing: suppose you're waaaay more pessimistic than I am. Say you think the time value of money is more like 3% because you don't trust that a bond fund can really get you 4.5%. Say you think room and dues inflation is going to be 4%. Under those assumptions, the DVC contract is worth more. It's now worth \$179,291, because those discounts in the future get very large, and the value of those future discounts are larger today, because you're not assuming you could make as much interest via other investments.

So DVC is a purchase that is more valuable to someone who is more pessimistic about the future. That's something I'm still trying to wrap my head around.

This chart also, I think, is potentially an explanation as to why Disney is willing to sell DVC when it's such a steal for the buyers. In essence, Disney is optimistic about the future. At a time value of money of 8.5%, the calculated value of the contract starts to approximately equal the actual selling price. At 10%, the value is well below the selling price. So if Disney thinks they can make 10% or more on capital, DVC is a huge win for them.

Here's a sample chart for 300 points of BLT where the room and dues are inflating at 3% per year and the time value of money is 4.5%:

Code:
```Year   Room        Dues        Savings      NPV
2013   \$4,378.50   \$1,350.00   \$3,028.50    \$104,046.40
2014   \$4,509.86   \$1,390.50   \$3,119.36    \$105,563.71
2015   \$4,645.15   \$1,432.22   \$3,212.94    \$107,054.35
2016   \$4,784.51   \$1,475.18   \$3,309.32    \$108,514.28
2017   \$4,928.04   \$1,519.44   \$3,408.60    \$109,939.17
2018   \$5,075.88   \$1,565.02   \$3,510.86    \$111,324.45
2019   \$5,228.16   \$1,611.97   \$3,616.19    \$112,665.20
2020   \$5,385.00   \$1,660.33   \$3,724.67    \$113,956.21
2021   \$5,546.55   \$1,710.14   \$3,836.41    \$115,191.96
2022   \$5,712.95   \$1,761.44   \$3,951.51    \$116,366.55
2023   \$5,884.34   \$1,814.29   \$4,070.05    \$117,473.72
2024   \$6,060.87   \$1,868.72   \$4,192.15    \$118,506.83
2025   \$6,242.69   \$1,924.78   \$4,317.92    \$119,458.84
2026   \$6,429.97   \$1,982.52   \$4,447.45    \$120,322.27
2027   \$6,622.87   \$2,042.00   \$4,580.88    \$121,089.18
2028   \$6,821.56   \$2,103.26   \$4,718.30    \$121,751.17
2029   \$7,026.21   \$2,166.35   \$4,859.85    \$122,299.35
2030   \$7,236.99   \$2,231.34   \$5,005.65    \$122,724.27
2031   \$7,454.10   \$2,298.28   \$5,155.82    \$123,015.96
2032   \$7,677.73   \$2,367.23   \$5,310.49    \$123,163.85
2033   \$7,908.06   \$2,438.25   \$5,469.81    \$123,156.76
2034   \$8,145.30   \$2,511.40   \$5,633.90    \$122,982.86
2035   \$8,389.66   \$2,586.74   \$5,802.92    \$122,629.66
2036   \$8,641.35   \$2,664.34   \$5,977.01    \$122,083.95
2037   \$8,900.59   \$2,744.27   \$6,156.32    \$121,331.75
2038   \$9,167.61   \$2,826.60   \$6,341.01    \$120,358.33
2039   \$9,442.63   \$2,911.40   \$6,531.24    \$119,148.10
2040   \$9,725.91   \$2,998.74   \$6,727.17    \$117,684.63
2041   \$10,017.69  \$3,088.70   \$6,928.99    \$115,950.54
2042   \$10,318.22  \$3,181.36   \$7,136.86    \$113,927.52
2043   \$10,627.77  \$3,276.80   \$7,350.96    \$111,596.24
2044   \$10,946.60  \$3,375.11   \$7,571.49    \$108,936.31
2045   \$11,275.00  \$3,476.36   \$7,798.64    \$105,926.24
2046   \$11,613.25  \$3,580.65   \$8,032.60    \$102,543.34
2047   \$11,961.65  \$3,688.07   \$8,273.58    \$98,763.73
2048   \$12,320.50  \$3,798.71   \$8,521.78    \$94,562.21
2049   \$12,690.11  \$3,912.68   \$8,777.44    \$89,912.25
2050   \$13,070.82  \$4,030.06   \$9,040.76    \$84,785.88
2051   \$13,462.94  \$4,150.96   \$9,311.98    \$79,153.65
2052   \$13,866.83  \$4,275.49   \$9,591.34    \$72,984.54
2053   \$14,282.83  \$4,403.75   \$9,879.08    \$66,245.89
2054   \$14,711.32  \$4,535.86   \$10,175.45   \$58,903.32
2055   \$15,152.66  \$4,671.94   \$10,480.72   \$50,920.62
2056   \$15,607.24  \$4,812.10   \$10,795.14   \$42,259.70
2057   \$16,075.45  \$4,956.46   \$11,118.99   \$32,880.46
2058   \$16,557.72  \$5,105.15   \$11,452.56   \$22,740.74
2059   \$17,054.45  \$5,258.31   \$11,796.14   \$11,796.14 ```

2. ### DIS SponsorThe Official Ticket Center is Orlandoâ€™s #1 discount attraction ticket agency, selling millions of Walt Disney tickets around the world.

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Now I am about to throw a wrench into your numbers (although it will make them favor DVC for the consumer even more), by law the maximum due increase can be 2% each year (I believe this is universal, but I know that's what it is for California, as we own at VGC). Incidentally, dues for DVC don't even get near a 2% increase per year (at least not ours or anyone I know).

Additionally, here are some other reasons that Disney is willing to sell DVC:
• Theme Park Tickets
• Food
• Souvenirs
• Air Fare (yes, they get a kick back in many cases)
• Additional cash hotel stays - Especially with things like the cheap annual passes they offered late last year, it got us back and we were out of points
• Goodwill - Gets others to come, gets people interested in adventures by disney, cruises, their movies, etc.

I am sure there are other reasons, but these are big ones.

4. ### dmunsilDisney Uber-Nerd

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Hmmm... are we talking about the same thing? Dues for VGC went up 5.77% last year, and 6.39% the year before that. Is there something else that's limited to 2% maybe?

I agree that for the parent company, one of the great features of DVC is that it works like a loyalty program, getting people to come back year after year. How they account for that in their profit/loss analysis for DVC is unknown. I tend to think they don't run DVC at a loss in order to get people to buy churros. I think they make money on DVC and the churros.

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Hmm...maybe I have the 2% wrong (I don't think so though, so I am wondering if that is some specific portion of the dues)?

I know, there is a maximum cap on due increases each year though, but now I am questioning what that cap is (maybe that's the 15% number I see periodically).

So, now I want to know where the 2% number came from, because I know thats there somewhere.

6. ### CarolMNDVC Co-ModeratorModerator

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Dues are limited by two things -

1. They can only reflect the cost of operating the resorts. A management fee (which is also capped) is included, but ad valorem taxes are not.

2. There is an annual cap equal to 15%.

You can find a history of annual fees in the DVC Resource Center - it's a Sticky Thread at the top of the forum..

FWIW, there were a few times the annual dues actually went down. Don't think that is going to happen again anytime soon, though.

Above is for WDW resorts. It may be different for other locations. I have never checked and only have MSPOS & POS for the BWV.

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The reason that Disney has DVC is so you are coming back to Disney much more frequently spending money on everything else they offer . Think about it if you didn't have DVC maybe you would go a week every 2-3 years instead you go every year cause its per paid and cheaper so you go more often .

I am glad you included the price increases for the rooms down the road that's something that is usually lost in comparisons

8. ### bighoo93Mouseketeer

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Thanks for posting this, I enjoy looking at analyses like this. Unfortunately, I don't have much time this morning so I am only skimming and may have missed some of the things I am going to ask about:

1) Are you using rack rate as Disney's cash price? I don't think most people pay that price for rooms, and there is certainly little need to. This would overstate the savings from DVC.

2) I don't understand why the NPV should increase over time, until you reach your tipping point. As a year goes by, there is definitively less value to your points--you have one fewer year of use. Their value should not be increasing, and suggests something odd with the NPV calculation. Or maybe I just haven't had my coffee yet.

I would expect that the NPV would decrease very slightly every year, until you approach the final 10 years or so, at which point it should accelerate rapidly. Every time a year passes, you have lost one year of use, and the value of that use comes off the back end (i.e., the last year). Those points also have the smallest value because they are the farthest off. For example, in hypothetical year 1, your last year is 40 years off, in year two your last year is 39 years off, etc. That is a lot of years for the time value of money to chip away, and illustrates why most NPV projections don't go nearly that far out (or else just include a residual value after 10 years).

Again, I could be reading this completely wrong, but it strikes me as off that the value would increase as available points decrease.

9. ### dmunsilDisney Uber-Nerd

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I forgot to go over that part. I calculated the cash price for three rooms and the point cost for those same three rooms at the same time of year. I picked the middle "Dream" season for DVC and a "Value" season for room rates by using the last week in August for comparison. I added in the 12.5% room tax and assumed a 10% discount. It's true that sometimes you can get discounts of more than 10%, but you can't count on them always being available it seems to me. Changing the discount to 20% lowers the NPV, but doesn't change the essence of the analysis.

I'd like to see if comparing room rates to points at peak times or very low times makes any difference. And I'd also like to do a "best deal" kind of thing where you buy points at the resort with the lowest dues, and use them to buy rooms with the biggest discounts possible. I mean, I already know that will look better, but how much better?

I know, my first assumption is that I'd made a mistake with the spreadsheet. After rechecking I realized what's going on. Because of price inflation, the discounts go up over time in nominal dollars. And you're willing to pay more money for the same discount if it happens sooner (time value of money). So as time marches on, you have fewer years of discounts remaining on your contract, which tends to lower the NPV, but you also have moved the largest discounts one year closer, which tends to raise the NPV. In the early part of a contract, the second factor is larger than the first. The result is that our imaginary "rational economic actor" should be willing to pay more for a BLT contract in its second year than in its first, even though they've missed out on the first year of discounts.

However, that's only in nominal dollars. We're accounting for inflation of rooms and dues in this analysis by calculating everything in nominal dollars and raising the nominal price of a room. If we calculate everything in inflation-adjusted dollars, then suddenly room and dues prices go up very slowly and the NPV of the contract goes down slowly in the beginning, accelerating near the end, just as your intuition would predict.

However, if you assume really high room and dues inflation, low core inflation (i.e. normal USA inflation), and very high value for money (10%+), you can still get the value of the contract in inflation-adjusted dollars to go up for a while at the beginning. It's just that the biggest discounts are at the end, so as they move closer in time, they become worth more to you today.

It's like if I had a bond that pays me \$1/year for 29 years, and \$10,000 in the 30th year, I will pay more for it next year than I would this year, even though next year I've already missed one payout, because the first year payout was smaller than the increase in present value of the \$10,000 balloon payment. In fact, that bond will go up in value for 30 years.

10. ### MinniesgalDIS Veteran

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You boys are making my head hurt. I think you need to go to Disney and chillax

11. ### Disney On The BayouMouseketeer

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I appreciate the analysis... I did something similar when I was analyzing what is the best DVC resale to purchase... After doing the analysis Vero Beach is the best value even considering the increased dues.

I think your numbers work out well in real life as well... I purchased VWL in 2001 direct from DVC for 75 per point. Its reasonable to net that same amount in a resale today. Considering the stays I have had in the past 12 years I have saved approximately 80% versus the rack rates.

Assuming I can sell and net my VWL contract for what I purchased it for... If you just exam 2013 alone you can see the tremendous value. The maintenance fee on 120 points is \$694.80 for 2013. 120 points would allow me to stay 7 nights in a studio at VWL in the dream season. Even if I was able to get an enormous discount and was able to stay there for \$150 per night including the tax I still come out ahead. 7 nights @ 150 = \$1050 Just that example demonstrates at least a 30% less cost and let's face it, you are never going to stay at Wilderness Lodge for \$150 including tax... Maybe \$240, but not \$150...

12. ### DisneyRegularsDIS Veteran

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I agree with this. I feel a better comparison would be to use point rental rates, say go with David's current \$14.00 per point rental costs rather than rack rates.

Since you have your spread sheet already, can you plug in rental rates versus rack rates and check the differences?

13. ### Mickey'sApprenticeShamelessly demand, it works bette

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I tend to look at the increases in maintenance fees and the increases in rack rates as a percentage as a wash. Is there a reason that I should not? It makes my calculations MUCH simpler and I think there is some truth in that assumption.

As for removing used years from cash value, I learned that it is best to draw diagrams so that you don't forget certain principals and cash flows.

Ultimately, I scraped through with my finance degree over 20 years ago and tend to only try to use these calculations when making major purchases. It also came up briefly in my MBA program. I'm curious. Did you major in accounting/ finance / engineering, or got intimately acquainted in this subject somewhere else.

14. ### Anthony1971DIS Veteran

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I would say to go use some points NOW
but since I am not doing so now either.......

I do not see the initial buy in--this can be simply done by X dollars divided by the number of years. But wait we must add some type of interest to this for not having that money each year assuming you paid in cash-- if you did not pay in cash we then need the interest you paid plus interest on the buy in. lets not forget compound interest...
we also could deduct the tax write off for the property taxes in the dues for those who itemize
It can get a lot better as if one were a good investor they may be able to get a return of say 7-10% or maybe they invested it all in Bank of America last year when it went down to under 7.00 and is now closer to 13.00 (feel free to take out the capital gains tax)
also being we are speaking of deluxe resorts the majority of people who stay at them would have good credit and pay with a rewards credit card earning them an additonal return of 1-2% on what they pay for the room and some times 5% for bonus catagories and a few other small amounts that may be offered for things like having a bank account at the same bank that issued the credit card.
Yes you can also put a value on the use of money as if I pay cash and something comes up where I need the money I can use it for something else if I own DVC I can not and may need a loan = interest.
also will you actually go to disney every year or twice a year and if you do will you stay in a deluxe resort every time.

I think the value in DVC is to he who enjoys it. If you try to put the value in an Excel spreadsheet there are just too many ifs and others than can be added in to make it look not as good... But it is still a good value if you keep it and use it as it is intended...
I have owned my contracts for almost 10 years... past math says a 7 year break even and then it is just the dues... however my DVC seems to have become family property... asking when I am going being I would not normally pay for others it now costs me more and bought more points to accomadate a year and a half after my first purchase.

15. ### Disney On The BayouMouseketeer

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I would have to agree Anthony... Despite all the numbers the bottom line is that had I not purchased, I simply would have not taken all the memorable vacations and all the ones I'm planning in the future. The value of that? Priceless

16. ### Jason99Earning My Ears

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I actually feel bad for you if you have to put this much thought into vacation. I would just rent if I were you

17. ### goNDmay9Mouseketeer

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What was the purpose of posting that? Some people enjoy number crunching and other's don't.

18. ### deploylinuxEarning My Ears

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I actually enjoy seeing others really try to simulate the long term value of dvc....like anything complex or with economics involved, there is no simple answer.....except that I agree that DVC makes more sense for those who are more pessimistic.

In general, people who own and buy hard capital goods or real estate do better than those who own or hoard cash or annuities during sustained poor economic conditions....provided that their own economic circumstance does not force them to sell early and they continue to have the economic resources to take advantage of opportunities.

There is certainly a significant risk of a major dollar devaluation due to debt/printing of money by the fed or a sustained inflationary spiral like the USA went through in the 70's....For those who are pessimistic, DVC does act somewhat as a hedge - at the minimum, to ensure that they will still be able to afford to take vacations.

That said...there is so much uncertaintity and disney could restructure things significantly at any point that forecasting for the long term isn't horribly helpful... DVC is just a small part of doing what one can to prepare for both good times and bad, and has its own pitfalls and tradeoffs. Some of us just like that it provides more structure and a fixed budget for vacation planning....

19. ### dmunsilDisney Uber-Nerd

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For BLT, using point rentals at \$14/point instead of cash rack rates produces a NPV of \$97,913. At \$12/point it's \$77,300. This assumes that point costs will go up in price a roughly the same rate as dues and cash rooms.

What I'm doing is adding the price for a week of a studio, a one bedroom, and a two bedroom and calling that the "cash equivalent" of the points for the same three rooms. I can't use one room, because the ratio of cash prices between studios and one bedrooms is different from the points ratios.

Once I have that cash equivalent, I can calculate the "cash per point" ratio, which is really the equivalent of the cost of a point rental. Essentially it says that for one point, I can get this much cash value of a room in this resort. It ranges from \$14.60 at BLT to \$19.20 at AKV. So renting points at \$14 isn't a huge savings from cash overall at BLT, at least during the season I'm looking at for the basket of rooms I'm using as a proxy. It obviously varies from room to room and season to season.

Just so you can see, those three BLT rooms in that season are \$502, \$606, and \$838 per night respectively. Add those together and multiply by 7 gets you \$13,622. Take off a 10% discount and then add the 12.5% room tax and you get \$13,792. Those three rooms in that season cost 174, 341, and 430 points for a week, respectively, or 945 points. Multiply by \$14 gets you \$13,230. Not a huge discount.

I took a stab at the "cheapskate" scenario, where one buys the cheapest points in terms of maintenance fees (BLT) and then uses them to buy the rooms with the biggest cash value per point, which (of the rooms I'm looking at) are AKV Savannah studios, at a cash per point of \$26.10. That produces a NPV (with the 3% dues inflation and 4.5% interest) of \$194,902.

Then I looked at the "spendthrift" scenario, where one buys the most expensive points (BWV) and uses them to buy the rooms with the lowest cash value per point (BLT one-bedrooms). That has a cash per point of \$13.98, and an NPV of \$48,354.

20. ### dmunsilDisney Uber-Nerd

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I originally was a math major, but I got bored and switched to theatre. Now I'm a software engineer. No finance background, but plenty of math and an interest in fiddling with numbers.

I essentially agree with this. As Yogi Berra once said, "Predictions are difficult, especially about the future."

I think it's useful to do these kinds of calculations if nothing else to get a feel for how good a particular deal is, how bad things can get and still realize a benefit, etc. I would never tell anyone that my chart represents some kind of scientific prediction about the future value of a DVC contract. It's a model. It can tell you some interesting things, but folks should never forget that the map is not the territory, so to speak.

21. ### hapablap21Earning My Ears

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I'm in the "use rental values" camp. At the end of the day, the market value of a single point is whatever someone is willing to pay for it. Once that equivalency is made, the only other things that matter are how long, and how much are maintenance fees. How long is known. Maintenance fees and their rate of growth are obviously a guesstimate. Trying to compare to rack rates is, IMO, a bad comparison, as it's pretty clear that the cash rack rates for DVC restorts are wildly inflated, as are the point values of the "disney collection" resorts.

So really, you can just NPV 50 years of whatever you think a point rents for right now - \$11, \$14, whatever. Grow it if you like, I prefer to be conservative and assume that they stay flat. At a 3% cost of capital (current 30 year T-Bond rate) and \$11/pt, a single point is "worth" right at \$300. Subtract out the per-point NPV of the expected maintenance fees, and voila - you have an actual value per point.

Another way that I thought to do it yesterday is to simply look at it as an interest bearing investment. You have some cash outlay that will return \$11 (or whatever) per point, per annum. For instance, BLT points can be bought resale in the neighborhood of \$100/pt. That will return \$11/pt annually, but you will also pay \$4.50/pt in MF annually, and you have to depreciate the \$100 over the next 46 years (straight line, that's another \$2.16 per year). Net profit is \$4.34 annually, or 4.3% annual ROI. That'll probably stay pretty constant, as it's a pretty safe assumption (IMO) that MF and rental rates will rise in concert. Not an amazing deal, but some of the others are pretty good. Saratoga looks more like 6.5%, which is a pretty good rate in today's environment.