Whither Motorcycle?

A Cost Benefit Analysis of Purchasing a Motorcycle in Chennai

(Word Count: ~1900)
[Note: I wanted to keep real numbers but alas that's too much information for a blog. So I use dummy numbers.  If anyone wants to use my template please write to me.]

1. Introduction

Everyone in Chennai (India) talks about auto-drivers. The auto drivers overcharge and are extremely discourteous. Everyone dislikes them. There is a radio program that encourages you to send a feedback about your experiences (good or bad) with auto drivers and they make it public!

When I was planning to spend a year in India true to my nature I had planned, with an Excel Sheet. Other than the kick I got out of it, such planning merited a good number when I was negotiating my remunerations with prospective employers. I kept a figure for purchasing a motorcycle in that analysis.

I came to Chennai and spent one month here haggling every morning and evening for 4 km ride on an auto. The price of Rs. 100 will disgust most of my friends who probably pay Rs.40 for a similar trip in Mumbai or Ahmedabad or an equivalent of Rs.89 in NYC. [1]

I did not feel like exploring Chennai. The discomfort of having to deal with the insults of auto drivers (http://mastersofthemultiverse.blogspot.in/2012/03/01apr2012.html) and haggling, made it all sour. I did not renew my British Library membership for almost a month. So, very soon I started thinking and discussing the purchase of  a motorcycle.

Bajaj Avenger

An idea of a more expensive motorcycle called Bajaj Avenger came up [2]. I couldn't decide if it is actually a good idea to buy it at a price higher than my initial plan. And since I have been trained in one systematic way of thinking about this, I decided to do it properly: a cost-benefit analysis! Belying every thought I had harbored that I will never use CBA after I pass this exam, I present a way to make informed decisions.

2. Time Frame of CBA

I use 13 months for my calculation. It is in part judged by the amount of time I plan to be in Chennai but also the way the loan for the motorcycle will be repaid. The least amount of interest is for 11 months (I can prepay it if I want, but that is how much I will have to pay). After the twelfth month I will have repaid the loan and can resell the asset. Sorry, I mean my lovely dear Avenger. Its name will be Parsu-Ram for many reasons.

Inflation: it affects the cost of petrol and a few other variables in my calculation, but I will ignore it, because it is difficult to predict in case of petrol prices. And I reasoned that the costs and benefits of the future are equally affected by inflation of petrol price so I can ignore it without much error. (If someone has an idea of how to incorporate inflation, please do not write to me, I don't really care).

3. Costs

Costs are straight forward. For convenience I divided them into fixed and variable costs.

3.1 Cost of the Motorcycle (Fixed cost)

The cost of the Avenger is a quote I get from the vendor (Q) [3]. I will make a portion of this price as a lump-sum down payment even if I get the bike on a loan scheme. This amount is 41% of the cost of the motorcycle quoted.

Above the quoted price, I will have a wind shield installed. And I will need to produce an affidavit that I am living in Chennai, since my rental agreement shows only 2 months so far.  These make 11% of the down payment cost.

So the amount I will have to pay lump-sum
L =  41% * Q * (1 + 11%)

3.2 Cost of Finance

If I were to take a loan plan I will have to pay a smaller down payment and later on monthly installment (MI) for the next 11 months. The cost of such finance is r% at Bajaj Finance, compounded monthly.

3.3 Petrol or Gas 

The unit for this calculation is two weeks, since my travel cycles are going to be in 2 weeks. That is how often I expect to go on long tours outside Chennai. The formula I have used for this is as following:

Within the city

Cost of petrol P1= (a+b+c) * d * e
a = distance to and fro work every day (km) X 10 (days)
b = distance to and from most frequented places in the city in two weeks
c = distance expected to travel if I go exploring the city, two weeks
d = mileage inside city
e = present cost of petrol

Inter-city Travels

Cost of petrol P2 = f*g*e
g = mileage on highway

f = distance to and fro on the highway, one in two weeks
e = present cost of petrol

Cost of petrol per month
P = (P1 + P2)*2

3.4 Maintenance

This cost consists of oil change and servicing of motorcycle. For new motorcycles, Bajaj gives three free servicings. That will cover 6 months of servicing cost. I have included the oil change for every 2000 km (mineral oil) to be on the safe side [4]

3.5 Emergency and Breakdowns

Since I plan to traverse long distances, I expect to have breakdowns and that means added costs. I kept a value of 14% of the cost of the motorcycle over the twelve month period. And in absence of any other realistic way to think about it accrued it every month. 

3.6 Opportunity Cost

If I was not using the money for motorcycle what was the largest return I could get on it? I have a loan which accrues interest at R%, and since this is the largest interest rate in the organised sector with low risk, it's my opportunity cost (in fact that IS what I would have done with this money). I used this interest rate to calculate my Net Present Value of the cash flows to reach a decision. 

4. Benefits

Benefits are also simple to calculate. I did not try to monetise many things that will swell the benefits and NPV of this investment, such as
1. The value of freedom and convenience of riding a motorcycle versus depending on getting an auto, esp if you are going to be out at night.
2. The value of not having to haggle with auto drivers
3. The value of reduced time for planning (where you want to go, how, booking tickets, hotel etc.)
4. The value of ownership and comfort of companionship something like a motorcycle can provide, and the pride of owning something beautiful.

4.1 Savings on Auto Costs

Two parts to this benefit:

1. Daily usage: for office

Savings on the cost of auto to and fro work for 21 working days of a month.

2. Biweekly trip to BL and exploring the city

Savings on the cost of auto to and fro places in the city I would like to visit on a biweekly basis.

4.2 Savings on cost of inter-city travels

Since I plan to do a lot of traveling outside Chennai and that is the major reason for getting a motorcycle like Avenger, the saving on the alternative modes of travel are benefits. The cost I have used for this purpose have headings such as:

1. Cost of taxi to the bus/train station, which in Chennai surprisingly can be as much or more than the cost of the travel.

2. Cost of bus ticket to and fro
I used quotes from a website (redbus.in) for AC volvo bus reservation for the destinations I have in mind.

3. Approx cost of taxis in the city visited, to and fro bus station and sightseeing. From experience (I keep detail accounts) I used an approx 20% of the sum of other two costs.

4.3 Resale

Even though most Bajaj motorcylces have a good resale value there is a lot of uncertainty on this number. I was looking at many resale websites for the value of a 1 -2 year old avenger. But these quotes are not very trustworthy, so to be on the safe side I use the analogy of a larger market: gearless scooter. 

A new gearless scooter resells at ~75% of its value after one year. I used that proportion to come to a number. I used 75% of the quoted price Q as the resale value R.

5. Calculation of Present Value

I used two numbers for basing my decision. 

Net Cash Flow: First is more intuitive net cash flow, which is simply the sum of all the monthly difference of the expenses between scenario of having an Avenger and not having one. This is the number I can say to my friends/nemesis... "I will save INSERT CASH FLOW rupees on autos and travel in 1 year." 

For more intelligent and sophisticated audience, such as you my dear reader, and for myself, I used the Net Present Value of the cash flow, which utilises the concept of opportunity cost or time value of money. I could have returned my loans instead of purchase my motorcycle. Cash flow minus the amount I could have saved on the interest is my NPV. Calculation in excel is easy, formula is shown in the picture.  

If the NPV of my cash flows is considerably less than zero I should not make this investment. If it was not zero but but only slightly negative or slightly positive I would have to resort to judgement based on the non-cash aspects, which I have ignored so far in my calculation. If the NPV is positive and a considerable amount I should make this investment. 

In my case, the NPV is a high positive number, more than 30% of the total investment involved.

6. Sensitivity of NPV

Having a high NPV was not good enough for me, I was not satisfied and ran a number of sensitivity tests (generally using solver function in Excel)

My NPV turns to zero:

1. ..when petrol prices rise 53% compared to the present price. (without changing the auto, bus costs)

2. ...if I had overstated my travel cost (bus train) by 51%

3. ...if my other loan interest rate is actually 38%. Since I use the loan interest rate as my opportunity cost this 38% can also be called my Internal Rate of Return, IRR.

4. ...only from the monthly savings, in 24 months (if I do not sell my motorcycle). Since in this time I will have saved the value of investment, 24 months is my Payback Period.

7. Result

I do.

Mom, I will save Rs 28,000 if I buy Bajaj Avenger!

8. Conclusion

Start with an end in mind, be smart about what to show and what to hide and you can prove anything with numbers, complete with sensitivity tests. ;)

9. Foot notes

[1]Reference Wikipedia, $14.1 for 5 miles with 5 mins wait time in Apr 2011, http://en.wikipedia.org/wiki/Taxicabs_of_the_United_States#New_York_City

[2] Multimedia Experience of Bajaj Avenger feel like god

[3] Base quote for Bajaj Avenger: feel like god for only Rs. Add 13% for insurance, basic accessories, etc to reach Q.

[4] If you don't know when to change your oil, every 2,000km (or every 6 months) is more than enough to be on the safe side. http://www.totalmotorcycle.com/school-SectionEight.htm