mxz

09-06-2012, 09:41 AM

It's been talked about a lot on here, but recently I saw a forum member in game who built two Night Clubs before upgrading the first. Previously, I'd seen talk that you should upgrade your first NC to level 3 before building the second. Well, here's more than you wanted to know about why that's a poor idea...and some basic economics mixed in.

I decided to do Net Present Value and Internal Rate of Return calculations for 3 scenarios over the course of a year (365 days):

(1) Building two NCs consequtively

(2) Building one NC and upgrading it to level 2

(3) Building one NC and upgrading it to level 3

What is Net Present Value (NPV)? This basically looks at the value of money thru time. A dollar today is worth more than a dollar tomorrow because you could have invested it. When looking at personal finance you generally use the inflation rate to calculate how much your money is/was worth yesterday/today/tomorrow. Businesses use a different rate because they can invest in research/development and are expecting a certain growth rate (say, around 15%). I used a rate of 1% since that's (about) what most CC building upgrade IRRs come out to.

What is Internal Rate of Return (IRR)? This is basically a calculation of the above mentioned rate when the NPV is 0. A simple way to think about this is if we knew how much milk cost in 1975 and how much it costs now, the IRR calculation would give us the rate of inflation (because the value of milk doesn't really change - like I said, very simplified).

Why do you use both of them? NPV skews towards bigger investments (or upgrades, in our case). So a Casino's NPV will blow a Sports Bar's away... in the long term the Casino obviously makes more money so that should be easy to understand. IRR, on the other hand, can skew towards smaller investments that pay off quicker. If we looked at the Casino build vs. a Sports Bar build over 50 days the Sport's Bar's IRR would look much better. So we use the two to make sure we get the full picture.

Assumptions:*

Discount rate of 1% (like I explained in the NPV, this is *about* what we expect from a standard CC upgrade).

You could build/upgrade immediately after the previous had finished. This effectively left-shifts the graphs, but in the end it isn't a huge deal since the differences are significant.

You do no other upgrading/building after this. Essentially that just complicates things; the scope of the exercise is to look at which investment(s) you should make, first.

You're playing for the long haul...not just a month or two.

http://img208.imageshack.us/img208/1491/36750706.jpg (http://imageshack.us/photo/my-images/208/36750706.jpg/)

Looking at the IRR chart you really begin to see why going to a level 2 NC is a better investment than the other 2 options. Upgrading to 2 has the quickest positive IRR (you're making money!) and it is also the highest. Remember that we assumed we could do everything right away, so if your IPH isn't stellar (maybe >$200k/hr) the NC1/2/3 curve will be skewed to the right by maybe 20-30 days. Since building another NC and upgrading the first one to 2 are *about* the same cost, there isn't much skew, relative to each other.

As you can see from the NPV chart: building 1 NC and upgrading to level 3 right away makes you a metric ****ton of money. But also notice that even upgrading it to level 2 and stopping makes you a whole lot of money sooner than building the second NC. Remember that NPV is different than just "breaking even" - it's taking into account other upgrades you could have done with your in-game cash.

TLDR:

Once you build your first NC your goal in the game should be to get it to level 2. Once that's done build your second and upgrade it to level 2. After that, ping pong the upgrades so they're similar levels.

Edit: good suggestion from AFed.

Also worth noting that this analysis should apply to all type A buildings (modifying payout values a bit).So if you're debating any of the ultra low level buildings (House, Tattoo Parlor) or mafia required (Italian Restaurant, Movie Theatre, Loft, Night Club) this strategy applies.

I decided to do Net Present Value and Internal Rate of Return calculations for 3 scenarios over the course of a year (365 days):

(1) Building two NCs consequtively

(2) Building one NC and upgrading it to level 2

(3) Building one NC and upgrading it to level 3

What is Net Present Value (NPV)? This basically looks at the value of money thru time. A dollar today is worth more than a dollar tomorrow because you could have invested it. When looking at personal finance you generally use the inflation rate to calculate how much your money is/was worth yesterday/today/tomorrow. Businesses use a different rate because they can invest in research/development and are expecting a certain growth rate (say, around 15%). I used a rate of 1% since that's (about) what most CC building upgrade IRRs come out to.

What is Internal Rate of Return (IRR)? This is basically a calculation of the above mentioned rate when the NPV is 0. A simple way to think about this is if we knew how much milk cost in 1975 and how much it costs now, the IRR calculation would give us the rate of inflation (because the value of milk doesn't really change - like I said, very simplified).

Why do you use both of them? NPV skews towards bigger investments (or upgrades, in our case). So a Casino's NPV will blow a Sports Bar's away... in the long term the Casino obviously makes more money so that should be easy to understand. IRR, on the other hand, can skew towards smaller investments that pay off quicker. If we looked at the Casino build vs. a Sports Bar build over 50 days the Sport's Bar's IRR would look much better. So we use the two to make sure we get the full picture.

Assumptions:*

Discount rate of 1% (like I explained in the NPV, this is *about* what we expect from a standard CC upgrade).

You could build/upgrade immediately after the previous had finished. This effectively left-shifts the graphs, but in the end it isn't a huge deal since the differences are significant.

You do no other upgrading/building after this. Essentially that just complicates things; the scope of the exercise is to look at which investment(s) you should make, first.

You're playing for the long haul...not just a month or two.

http://img208.imageshack.us/img208/1491/36750706.jpg (http://imageshack.us/photo/my-images/208/36750706.jpg/)

Looking at the IRR chart you really begin to see why going to a level 2 NC is a better investment than the other 2 options. Upgrading to 2 has the quickest positive IRR (you're making money!) and it is also the highest. Remember that we assumed we could do everything right away, so if your IPH isn't stellar (maybe >$200k/hr) the NC1/2/3 curve will be skewed to the right by maybe 20-30 days. Since building another NC and upgrading the first one to 2 are *about* the same cost, there isn't much skew, relative to each other.

As you can see from the NPV chart: building 1 NC and upgrading to level 3 right away makes you a metric ****ton of money. But also notice that even upgrading it to level 2 and stopping makes you a whole lot of money sooner than building the second NC. Remember that NPV is different than just "breaking even" - it's taking into account other upgrades you could have done with your in-game cash.

TLDR:

Once you build your first NC your goal in the game should be to get it to level 2. Once that's done build your second and upgrade it to level 2. After that, ping pong the upgrades so they're similar levels.

Edit: good suggestion from AFed.

Also worth noting that this analysis should apply to all type A buildings (modifying payout values a bit).So if you're debating any of the ultra low level buildings (House, Tattoo Parlor) or mafia required (Italian Restaurant, Movie Theatre, Loft, Night Club) this strategy applies.