Spreadsheet Warriors - how have you calculated the all in real cost?

[TDK44]

Yes, I understand that--I argue in favor of this point on DISboards all the time, and have for probably ten years, and maybe closer to twenty. But something that costs $100 today is only going to cost ~$104 next year. And Dues are a cost. So, if you want to know what your Dues bill is going to be in then-current dollars in N years, you should use something a little more than long-run inflation.

You should still project the costs out based on their expected growth rate, whether that’s inflation or a little more. Obviously the point is to project expected cash flows.

You should still discount those back at your opportunity cost though, not at their growth rate (otherwise the NPV would always be zero).

 

[E2ME2]

I have run so many scenarios toward this end, and built way too many spreadsheets, and would run a Monte Carlo simulation if I could. However, I believe it's an apples-to-oranges comparison if you're treating any calculated "savings" as "ROI".
ROI is used to project PROFIT. For most of us, we're not buying DVC to make a profit on our investment.
That's what my 401K/IRA is for!
I bought DVC to be able to spend family time in one of the world's largest resort destinations in "deluxe" level accommodations.
By buying DVC (a mix of Direct & Resale) I have front-loaded those costs at time of purchase, but I am realizing significant savings at time of use. I also get the personal satisfaction and gratification that comes from enjoying vacationing "in the bubble" in said deluxe accommodations. Try as you might, you can not quantify that benefit as profit.
You can, however, calculate an approximate payback (breakeven) period, based on the comparisons identified above (Rack Rate / Discounted Rack Rate/ DVC Rental Prices). Having done that many times over, I typically show reaching that point in about 7-8 years after purchase date. As long as you are using your points regularly for greater than 8 years, you most definitely can realize a savings, but do not confuse savings with profit.
... just my $0.02........

 

[TDK44]

I have run so many scenarios toward this end, and built way too many spreadsheets, and would run a Monte Carlo simulation if I could. However, I believe it's an apples-to-oranges comparison if you're treating any calculated "savings" as "ROI".
ROI is used to project PROFIT. For most of us, we're not buying DVC to make a profit on our investment.
That's what my 401K/IRA is for!
I bought DVC to be able to spend family time in one of the world's largest resort destinations in "deluxe" level accommodations.
By buying DVC (a mix of Direct & Resale) I have front-loaded those costs at time of purchase, but I am realizing significant savings at time of use. I also get the personal satisfaction and gratification that comes from enjoying vacationing "in the bubble" in said deluxe accommodations. Try as you might, you can not quantify that benefit as profit.
You can, however, calculate an approximate payback (breakeven) period, based on the comparisons identified above (Rack Rate / Discounted Rack Rate/ DVC Rental Prices). Having done that many times over, I typically show reaching that point in about 7-8 years after purchase date. As long as you are using your points regularly for greater than 8 years, you most definitely can realize a savings, but do not confuse savings with profit.
... just my $0.02........

I don't think anyone is talking about profit. It's just the same thing you're talking about front-loading those costs and then having future use benefits of staying in deluxe accommodations with family etc. etc. -- and looking at the payback/breakeven period but also taking into account the time value of money.

In which case yes, payback/breakeven in absolute dollars for a direct purchase contract is about 7-8 years, but if you account for time value of money it's more like 14-17.

 

[Galactic Reversal]

While I think they've set the analysis up correctly, I still believe a 6.5% after tax return over 40+ years is just way too low.

IMO, DVC is much more akin to bonds than equities. The "returns" are fixed and dues inflation predictable, the risk of default is extremely low.

If anything, the benefit of being able to smooth out short term volatility over the long term means longer-dated cash flows should be discounted at an aggressive market rate.

This would be true if it was say, a retirement account in the accumulation phase. But in the alternative scenario, investing the upfront DVC cost and using the returns to finance vacations, regular withdrawals are being made. Most financial planners will tell you 4% is a safe long-term withdrawal rate. Not really a fair argument as that's intended to guarantee lifetime income, but illustrates my point as it is well below 8.5% and falls far short of enough to book the same room that purchasing resale DVC would, even at the cheapest point rental rates.

Example: 160 points at AKV gets you 5 week nights in March in a 1 bedroom resort view villa. That's an upfront cost buying on the retail market of $105/pt (generous according to the rofr thread) + dues/fees ~ $19,000.

Assuming you rent those points instead, at $20/pt, that's $3,200 per year for your March accomodation. Subtract out the dues you'd have paid each year (3,200 - 1,544 = $1,656) and you're looking at about an 8% withdrawal rate (assuming you draw down the balance to zero at the end of 32 years). You'd have to earn a consistent 8% return for the next 32 years, if at any point your average returns dip below that threshold, the scenario fails.

Anyway, that was a lot to say I think a lower discount rate is justified due to the different risk profiles of the "investments". I agree with a lot of what you're saying, I just can't get on board with an 8.5% discount rate unless we're running simulations and looking at probabilities. In my AKV example, using 8.5% after-tax returns with 12% volatility, the probability of shortfall over 32 years is above 50%. With the DVC contract, dues might increase a bit more than expected, but you're never missing your vacation. Said another way, I would want a lot more seed capital in my investment account (~$32,000 for 95% confidence) to ensure I would always be able to take my vacation than the initial cost of DVC.

I made monte carlo tool for any other financial math nerds:
AKV example monte carlo sim

 

[tidefan]

In tomorrow's lecture, we will discuss Markov Chains...

 

[Mouseforward]

I travel solo, and even my flight+food+car service+tickets can surpass the cost of the room. So since the "non room" costs increase per person I can imagine for a family of 4 this becomes less significant.

 

[DoubleBaconBLT]

I have a spreadsheet that shows the all-in upfront cost of my contract along with all of the future cash flows, discounted back to the present, so that everything is in 2025 dollars. Obviously any discounting impact is going to heavily depend on the interest rate you choose. If you want a simplified view of everything, you can just pick 5% across the board. That's decently close to the risk-free rate of return you might expect to get over the next ~30 years. That's almost exactly the rate BLT dues have increased by since inception. That's reasonably close to the rate at which standard prices of BLT rooms have increased in the last three years.

When you do that math, the upfront cost was right at $25K. The present value of all future dues payments adds up to $55K, making the total cost $80K in present value. The dollar value of the points in the room type and month we intend to mostly use it works out to just over $6K per year at rack rates. That makes the sum of present value $210K.

Subtracting the total cost, the contract is "worth" $130K in 2025 dollars at rack rate. Generally, you can get a 25% discount on rack rate though, so if you use that instead, the dollar value per year is $4.5K, and the total value is $158K. That makes the contract "worth" $78K. To make the contract worth exactly what I paid for it, I would have to be able to get a discount of 62% off rack rates. The internal rate of return (IRR) of the contract at rack rates is 19%. At 25% off rack rates, the IRR is 12%. Both are better than my investment portfolio has averaged since inception, so it was pretty easy to justify pulling funds out to buy the DVC contract.

Summary (with all future cash flows discounted to 2025 at 5%)

Upfront cost: $25K
PV of future dues cost: $55K
Total Cost: $80K
PV of Value at Rack Rate: $210K
Net Present Value at Rack Rate: $130K
PV of Value at 25% off Rack Rate: $158K
Net Present Value at 25% off Rack Rate: $78K
Breakeven Discount off Rack Rate: 62%
IRR at Rack Rate: 19%
IRR at 25% off Rack Rate: 12%

 

[DoubleBaconBLT]

I have run so many scenarios toward this end, and built way too many spreadsheets, and would run a Monte Carlo simulation if I could. However, I believe it's an apples-to-oranges comparison if you're treating any calculated "savings" as "ROI".
ROI is used to project PROFIT. For most of us, we're not buying DVC to make a profit on our investment.
That's what my 401K/IRA is for!
I bought DVC to be able to spend family time in one of the world's largest resort destinations in "deluxe" level accommodations.
By buying DVC (a mix of Direct & Resale) I have front-loaded those costs at time of purchase, but I am realizing significant savings at time of use. I also get the personal satisfaction and gratification that comes from enjoying vacationing "in the bubble" in said deluxe accommodations. Try as you might, you can not quantify that benefit as profit.
You can, however, calculate an approximate payback (breakeven) period, based on the comparisons identified above (Rack Rate / Discounted Rack Rate/ DVC Rental Prices). Having done that many times over, I typically show reaching that point in about 7-8 years after purchase date. As long as you are using your points regularly for greater than 8 years, you most definitely can realize a savings, but do not confuse savings with profit.
... just my $0.02........

Instead of an "ROI", the term to use is "Internal Rate of Return" (IRR). That's what's used for project analysis, cost/benefit analysis, etc in all sorts of industries. Even if no "profit" arises from something, it can still be assigned an IRR. So for example, this is what municipal governments do when evaluating whether to build a new road or not. No one will be paying them to use it (assuming it's not a toll road), so they're just trying to assess whether enough people will use it to justify the cost. They estimate the value of each trip, estimate the number of trips per year, discount it back to the present using their rate assumption, then compare that present value to their total costs. If the IRR is above their threshold, they approve the project. It's one of the best ways large organizations can assess which projects should proceed and which shouldn't.

 

[E2ME2]

Instead of an "ROI", the term to use is "Internal Rate of Return" (IRR). That's what's used for project analysis, cost/benefit analysis, etc in all sorts of industries. Even if no "profit" arises from something, it can still be assigned an IRR. So for example, this is what municipal governments do when evaluating whether to build a new road or not. No one will be paying them to use it (assuming it's not a toll road), so they're just trying to assess whether enough people will use it to justify the cost. They estimate the value of each trip, estimate the number of trips per year, discount it back to the present using their rate assumption, then compare that present value to their total costs. If the IRR is above their threshold, they approve the project. It's one of the best ways large organizations can assess which projects should proceed and which shouldn't.

Understood-
Familiar with IRR / NPV / ROI / CBA and the like - I just don't see any of them being applicable to timeshare purchases.

 

[Mousemath]

I have a spreadsheet that shows the all-in upfront cost of my contract along with all of the future cash flows, discounted back to the present, so that everything is in 2025 dollars. Obviously any discounting impact is going to heavily depend on the interest rate you choose. If you want a simplified view of everything, you can just pick 5% across the board. That's decently close to the risk-free rate of return you might expect to get over the next ~30 years. That's almost exactly the rate BLT dues have increased by since inception. That's reasonably close to the rate at which standard prices of BLT rooms have increased in the last three years.

When you do that math, the upfront cost was right at $25K. The present value of all future dues payments adds up to $55K, making the total cost $80K in present value. The dollar value of the points in the room type and month we intend to mostly use it works out to just over $6K per year at rack rates. That makes the sum of present value $210K.

Subtracting the total cost, the contract is "worth" $130K in 2025 dollars at rack rate. Generally, you can get a 25% discount on rack rate though, so if you use that instead, the dollar value per year is $4.5K, and the total value is $158K. That makes the contract "worth" $78K. To make the contract worth exactly what I paid for it, I would have to be able to get a discount of 62% off rack rates. The internal rate of return (IRR) of the contract at rack rates is 19%. At 25% off rack rates, the IRR is 12%. Both are better than my investment portfolio has averaged since inception, so it was pretty easy to justify pulling funds out to buy the DVC contract.

Summary (with all future cash flows discounted to 2025 at 5%)

Upfront cost: $25K
PV of future dues cost: $55K
Total Cost: $80K
PV of Value at Rack Rate: $210K
Net Present Value at Rack Rate: $130K
PV of Value at 25% off Rack Rate: $158K
Net Present Value at 25% off Rack Rate: $78K
Breakeven Discount off Rack Rate: 62%
IRR at Rack Rate: 19%
IRR at 25% off Rack Rate: 12%

Love it! Thanks for sharing!