ROI / IRR / CAGR - Finance Industry ?

[aces27]

Say I Finance 75 vehicles
Initial Capital : = 75 vehicles * 180,000 Lac per vehicle = 13,500,000

Rate of Interest : 1.3% per month
However Calculation practise in the Industry is such that for 36 months :
Interest : 1.3% * 36 * 180,000 = 84,240
EMI Amount : (84,240 + 180,000) / 36 = 7340

So every month , 7340 is collected per vehicle.

What is my annual IRR / ROI / CAGR ?
Case 1 : No increase in number of vehicles further.
Case 2 : Keep increasing the number of vehicles , everytime sufficient money is collected.

I am trying to understand this annual return / growth percentage in comparison
with return in Equity / Mutual Funds Investment / Property Appreciation / Operating a Factory or Business which are (15-25% annually mostly) .
Please also comment on this as well.

 

[cinderblock]

First, your EMI calculation is mistaken.

The EMI for each vehicle is ~6300 (6292 to be exact). Use Excel or an online EMI calculator. The reason why you are mistaken is that you don't continue to pay interest on the entire amount for the full EMI term. The interest is paid on reducing balance. Of course you can re-employ the portion of the capital repaid every year

 

[aces27]

First, your EMI calculation is mistaken.

The EMI for each vehicle is ~6300 (6292 to be exact). Use Excel or an online EMI calculator. The reason why you are mistaken is that you don't continue to pay interest on the entire amount for the full EMI term. The interest is paid on reducing balance. Of course you can re-employ the portion of the capital repaid every year

I understand that the Prinicipal is reducing. Thats the normal practise. However Private Financiers do not calculate it like that.
Thats why made a specific point of mentioning the same. The example provided is actual Real Life practise.

 

[cinderblock]

Okay. So you will receive an interest of 84240 on investment of 180000. That's a 14% ROI p.a.

IRR is about 20%

CAGR of capital will be = (% increase in vehicles per year)*ROI

If 20% increase then, 1.2*1.14 = 36%

If no increase, your invested capital will still grow @14% ROI

 

[aces27]

Okay. So you will receive an interest of 84240 on investment of 180000. That's a 14% ROI

IRR is about 20%

Which Case is this ? With increase in vehicles or without.
ROI is different from IRR ?
If you put in excel , the cashflows -180,000 and the +7340 <36 times> , use the Formula IRR on this , you get a IRR of 2.24 per month , which annualized is 30.49. Thats what confused me.

On the other hand 180,000 * 1.135 * 1.135 * 1.135 =7340*36 = 264000. Which also shouldnt be correct , as 13.5% is even less than 1.3% x 12 = 15.6%

 

[cinderblock]

You will get an ROI of 14% per annum per vehicle (with or without growth).

IRR and ROI are different. IRR assumes that you have redeployed capital paid back at the same ROI. ROI is one-time investment and return. Thus IRR>ROI, monthly IRR>Annual IRR and so on..

I used annual figures to calculate IRR. But if you used monthly numbers then that's okay too. Answers will be different though within range. Stick to one time frame. Monthly Or annually

 

[aces27]

Okay. So you will receive an interest of 84240 on investment of 180000. That's a 14% ROI p.a.

IRR is about 20%

CAGR of capital will be = (% increase in vehicles per year)*ROI

If 20% increase then, 1.2*1.14 = 36%

If no increase, your invested capital will still grow @14% ROI

So at , 75 vehicles financed with 1.35 crores. I get a cash flow of 75 x 7340 = 550,500. I can now finance 3 more vehicles per month.
Hence 12 x 3 = 36 more vehciles by end of year.

36/75 = 48% per cent increase.

Based on your formula =
1.48 x 1.14 = 1.68 , A whopping 68% CAGR ?


Will ROI and IRR be static irrespective of number of vehicles being increased ?
Can you please share the working / advise on the calcualtion methodolgy.
Can you please highlight the difference between the IRR / ROI / CAGR with respect to this example.
I am trying to compare it with "when HDFC Bank stock becomes 55 times in 17 years" it is 26% CAGR.
Looking forward to learn a bit from you. Thanks.

 

[cinderblock]

Based on your formula =
1.48 x 1.14 = 1.68 , A whopping 68% CAGR ?


.

CAGR on your base numbers, not on your ROI per vehicle. It includes a 48% increase in investment by you

CAGR of total capital has gone up only because your investment has gone up. An increase in AUM does not mean the fund is now more profitable. Only that it makes more money with more money.

ROI per vehicle still remains the same

 

[aces27]

So ROI = CAGR , in case I do not increase the number of vehicles. Which is 13.5% ? How come it less than 1.3 * 12 = 15.6.
The number 13.5 holds some meaning as 180 * (1.135^3) = 264. Which is actual growth in wealth.

And IRR calculated by excel , is calcualting in a manner wherein it assumes every month the collected 7340 is reinvested at the same IRR rate.

How does this compare to 26% growth in wealth by HDFC stock.
Or 15-25% by Mutual funds over a long term.

 

[aces27]

ROI per vehicle may remain the same.
Money from Profit reinvested. I still started out with a fixed amount.
But the business has grown right , I can have more vehicles under my Finance.
My wealth does increase. What is the rate at which my wealth is increasing.

In case I dont re-invest 14%.
And if I do 30% ?

?