Home' Trinidad and Tobago Guardian : September 13th 2015 Contents The case hen she was 26
chased a 10,000
square foot lot of
land in a housing
At the time of purchase her bank offered
100 per cent financing repayable over 15 years
and at an interest rate of nine per cent. All
that she was required to pay was the legal
costs of $19,000 and bank fees of $4,875.
Every year she would pay a contractor $2,500
to cut the grass and keep the drains clear of
debris. On the seventh anniversary of the pur-
chase, Natasha sold the property to her cousin
Jamal for $700,000; $375,000 more than the
price she paid for it.
Whilst she knows that she may have made
a profit, she cannot precisely gauge by what
amount. Further, she also wants to know if
her returns kept pace with her inflation
assumption of five per cent annually.
Ostensibly, Natasha made a profit of
$375,000 from the sale of the land but this
is only if she had purchased it with cash of
$325,000 and sold it at $700,000.
She did not even make a down payment
because the bank financed 100 per cent of
the cost. The loan was for 15 years but she
only paid installments for seven years, so it
means that she would have had a balance out-
standing at the point of sale.
From our estimation, and based on the vari-
ables given, she should have owed about
$225,005, which means that after the debt
was cleared she ended up with $474,995 cash
in hand ($700,000 - $225,005).
Was this her real profit figure?
The simple calculation for profit is: sale
price minus cost of goods sold, equals gross
profit less expenses, equals net profit.
The formula requires us to firstly ask: what
was the actual cost of goods sold and, secondly,
what were the expenses related to the invest-
The cost of goods, in this case, was indeed
the purchase price of $325,000. However, it
was actually split between the cumulative
principal payments on the loan of $99,995
and the pay off figure of $225,005, leaving a
gross profit of $375,000 ($700,000 -
The next step would be to tally up all of the
expenses involved so that we could arrive at
the net profit figure.
The first item would be to estimate the
interest cost paid to date.
Based on a monthly loan payment of
$3,296.37 over the seven-year period, the total
installments made to the bank were $276,895.
If the principal paid were $99,995 then the
interest expense would have been $176,900
($276,895 - $99,995).
The total expense for maintenance was
$17,500 ($2,500 x 7 years) and the legal and
bank expenses were $19,000 and $4,875
This brings our total expense figure up to
$218,275 which when subtracted from the gross
profit of $375,000 equals $156,725.
Cash in hand
Out of the $474,995 of cash in hand, only
$156,725 was actually net profit, the remaining
$318,270 was a recovery of her cumulative
principal payments and all other expenses
incurred over the life of the investment.
Return on investment
Whilst Natasha made a decent profit in
terms of dollars, it does not take into account
the passage of time and the impact of infla-
tion on the value of her investment. Up until
the sale, Natasha has been sinking money
into the deal and, with any such venture,
there is always the hope of a full recovery
of the original investment and an acceptable
rate of return as well.
In Natasha s case, her hurdle was five per
cent annually, so anything above this would
have exceeded her expectation.
For all payments including: legal fees, bank
charges, loan installments (principal and
interest) and maintenance fees, we applied
the annualised hurdle rate of five per cent
taking into account the varying amounts
invested and the timing of each cash flow.
She paid out a total of $318,270 so she should
have in hand at least $384,670 after the sale.
Truth and, in fact, she ended up with
$474,995 which was $90,325 more than
Taking into account her hurdle rate, indi-
vidual cash flows, their direction (in or out,
+/ -), timing and reinvestment rates, we
estimate that Natasha s venture would have
yielded an internal rate of return (IRR) of
10.2 per cent and a modified internal rate of
return (MIRR) of about 8.1 per cent.
F C C
SEPTEMBER 13 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Profit or loss?
Calculating returns on investment
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