Investment Exit plan - Decision Making Via XIRR and XNPV 2

Extended story from Miss K (http://seannchine.blogspot.com/2010/07/investment-exit-plan-decision-making.html)

Layman calculation:
1) Holding yield (HY) and Holding period yield (HPY).
It cant be used to compare with other annualized rate (Fixed Deposit rate, Inflation, GDP, etc.). For example, HY for the share from first investment 13-Aug-06 to 16-Aug-10 is (8.47-7.6)/7.6 = 11.44%; while second investment 28-Aug-07 is (8.47-7.24)/7.24 = 16.99%. Holding Period Yield (HPY) for the individual investment are 2.68% p.a.(11.44%/4) and 5.66% (16.99%/3) respectively. In this return calculation , however, dividends given from the subsequent years are not taken into account for the HY calculation.

2) Average Return
For a layman calculation, they take average cost which is (300*7.6+1700*7.24)/(300+1700) = 7.29. Today price, said 8.47, means HY is (8.47-7.29)/7.29 = 16.19%. Holding period yield over period (HPY) = 16.19%/4 = 4.05% p.a. if compares it with FD rate 3.25% p.a., then it is not a good investment if you ignore dividend (in the case, dividend from Share G is too less, it can be ignore). Something very wrong which is using 4 years as the denominator. emm...

3) Dividend Return
If we need to take the dividend into the account, then just sum up all dividend per share (DPS), which is 0.02+0.22+0.03+0.02+0.03+0.03 = 0.35. Dividend yield is 0.35/7.29/4 = 1.2% p.a.

4) Total Return
Thus, total return is return of appreciation + return of dividend yield = 4.05+1.2% = 5.25% p.a. It is not a successful investment because it has to offset with inflation which about 4% p.a. Layman’s Real return is 5.25% - 4% = 1.25%.

 
In the practical way, I mean time value of money, it shall be calculated in the cash flow which varies with date given. Thus, Compounded Annualized Growth Rate (CAGR) is calculated via XIRR = 6.47% p.a. Real return = (1+5.25%)/(1+4%)-1 =1.20%.

Miss K wants to sell it because it is one of the investments that not really contribute much for her portfolio's CAGR. To increase her portfolio's CAGR, she needs to liquidate it in order to buy another better return stock. Thus, solver, once again, is used to solve for the desired CAGR return for 8%, 10% and 15%. The exit plan is suggested to liquidate the share by selling it at RM9.40 if she aims for 10% CAGR, while RM10.83 at 15% CAGR.