ROI calculations?

[Mr Whippy]

I'm doing lots of value juggling and struggling with something.

Stay in investment at £17,333 and expose myself to a £520k windfall in future (no idea on chances, 1 in 20, 1 in 4, no idea?)
Take out £17,333 cash and expose myself to £260k in future (same odds, won't change materially based on which I pick)
Take out £13,000 cash and expose myself to £390k in future (still as above on odds)


The last seems "best" as it only costs £4,333 in lost cash for an extra £130k in future value (30x), whereas to get the extra £130k again costs £130,000 (10x), vs the first one which is 30x... but this is where I get confused.

How should I compare them all fairly?

I think it's reasonable to assume all values have the same opportunity to go up/down with inflation, so the £17,333 left invested today, or taken as cash and invested elsewhere, will likely scale equally with the future return value too.


So where am I going wrong comparing the three options on 'ROI basis'?

Since you start off owning the investment, how do you calculate the ROIs fairly?


I'm sure this is bread and butter logic for investment professionals but I'm not one hehe


Thanks for any help.

Edited by Mr Whippy on Tuesday 11th July 19:25

[Mogul]

The XIRR function in Excel is your friend.

If an investment of £10k returns £11k after 12 months, that’s an IRR of 10%pa. If it takes 18 months, the IRR drops to 7% etc.

With the XIRR function you can input the precise dates for each cashflow (outflows and inflows) and it will tell you what the IRR is and compare the relative returns of different scenarios/opportunities. Higher = better.

In your three scenarios, you haven’t told us how long this investment is expected to take to come good, but if you can make £260k with £nil exposure, that is far superior to either of the other two scenarios in IRR terms, as you could find something else to do with your £17,333 stake money…

[Mr Whippy]

Stay in for say £10,000 and get £300,000 (30x) out maybe in future. But £10,000 is stuck wrapped up for maybe decades or longer. And ultimately it'll likely only change in value at rate of inflation.

Get out with £10,000 and get £150,000 (15x) out maybe in future. But can go put that £10,000 to work maybe for decades at higher yield than inflation, to make up the difference.

Or alternatively, get even more out, say £20,000, and get to work with it to offset the loss of potential windfall in the future, or indeed the loss of accumulation of the initial invested sum beyond inflation.



I'm wondering if fixing future outcomes might be a good way to do it, so say all three pay out the same, and see what assumptions have to be true to make that the case.
Then I can make gut based decisions on if I think they'll happen or not.


You're right that some kind of Excel sheet using the investing functions is the way to go here.


Now where is my crystal ball.