A Financial Analysis of Buying DVC: In the “Does DVC Membership Make Sense?” page, I said I wasn’t going to try to present a detailed financial analysis, as that gets very complex pretty quickly, factoring in the time value of money and opportunity cost.
Well, I found an Excel spreadsheet on the Internet. You plug in your own purchase information and assumptions into the model, and it does a cost comparison – including the time value of money. (MouseSavers.com has an equivalent)
For those interested in a discussion of renting points versus buying DVC, see the “Why should I buy DVC if I can just rent points?” page.
For those into finance, I’d appreciate any feedback on the model (as I’m a technologist and not a financial analyst).
The first tab is for VGF and the second tab is for PVB. You plug in:
- Number of points
- Cost per point
- Closing fees
- Equivalent number of nights in a Disney hotel
- Disney hotel rate (be sure to include taxes)
- Initial annual dues per point
- Assumed rates of increase for annual dues / hotel
- Discount rate – what you would expect to earn if you invested the money
The third tab covers the case of buying points only to rent them. The internal rate of return (IRR) is calculated. You’d compare this to would you would expect to earn over the long run by putting your money in a diversified stock fund.
All the numbers in the yellow cells are meant to be changed by you to reflect your own situation. It’s just a model.
Please set your own realistic expectations for the annual dues increase and the discount rate for cash flows, as the figures in the spreadsheet are just placeholders. In terms of the discount rate, pick a ROI that you could actually achieve year-over-year.
While this is an interesting intellectual exercise, The bottom line DVC equation for me is:
family + good times + Disney = Happiness
DVC wasn’t a financial decision for me.
I’d also like to quote Don Munsil of MouseSavers on this topic:
Anyway, it’s bothered me for a while that lots of people calculate the “all in” cost of DVC by adding the dues cost to the buy-in divided by the number of years. That’s not right. Money now is worth more than money later. If I am buying something that will get me a discount 40 years from now, I will not pay the same amount of money as if I’m getting a discount today.
(There’s a related error where people calculate their “payoff point” in years by adding up all their discounts to see in what year they end up “paying off” their buy in. That’s also not right – it takes more years than the simple analysis would suggest, because the money you are going to save in the future is worth less than the money you paid in the present.)
One way to spread a buy-in cost over a number of years is an amortization. This is the same calculation used to figure the payment on a mortgage of a certain amount, which makes sense, because in essence you’re the bank – you give Disney a chunk of money, and they promise to “pay it back” by giving you discounts on rooms in future years. The cost to you for those discounted rooms in the future is the amortized cost.
In other words, of the discounts Disney is giving you, the amortized cost is just the payback of the money you paid in. That’s the amount of money you could have gotten just putting the money in a mutual fund and slowly drawing money out until it was down to 0 somewhere in the future.
So for, say, Boardwalk, there are 29 years remaining. If I had to pay $72 per point, how much per point per year, assuming that I could have put $72 into a mutual fund earning 4.5% instead? The answer is $4.49, which is much higher than the simple $72/29, or $2.48. So my all-in cost is $4.49 every year, plus the dues cost, though to be a useful analysis I need to account for the rise on costs of dues over time.
However, that’s not as useful a way of looking at it. For one thing, there’s inflation. Amortization calculates a fixed payment in nominal dollars every period, because that’s the way most people think about money. Calculating everything in “real” (i.e. inflation-adjusted) dollars is hard to work out. But not doing do makes things difficult to project far into the future. Near the end of the Boardwalk contract’s life, my dues might have risen to $11, but the amortized buy-in (using my previous calculation) is still $4.49. Since the cost of everything else in the world has gone up, my cost per year has gone down in real dollars.
One way to get around this is to do inflation-adjusted amortization. A simple way of doing that is to pick what appears to be a reasonable inflation amount and subtract it from my implied interest rate that I could get for my money. So if I think I can get 4.5% from a mutual fund, but inflation is going to be 2%, then I calculate the amortization as 4.5% – 2% = 2.5%. Then I’m getting a “real dollar” amortization. Now my cost for my $72 per point contract is $3.52 per year in constant 2013 dollars. In fact that number in nominal dollars will go up by 2% every year, but it’s the same value in real inflation-adjusted dollars.
Doing inflation adjustment on the buy-in means I need to do inflation adjustment on my dues increase as well. It means that a 3.5% dues increase per year is a 1.5% dues increase in real dollars. Again, accounting for all of this can make your head hurt. The key is to either do everything in real dollars or in nominal dollars and stick to it.
Ultimately whether you do a real dollar amortization or a nominal dollar amortization is a bit of a complicated decision, and it depends on the analysis you’re trying to do. But either one is clearly a better way to go than just dividing the buy-in cost by the number of years. Doing that kind of simple division understates the cost of buying DVC, which to some extent is something that Disney exploits to make the purchase appear more attractive than it really is.