W3.1_WAS_Choosing Investment Instrument for Hajj Payment


Step 1- Problem or Opportunity Statement
In my previous blog posting https://simatupangaace2014.wordpress.com/2013/09/07/310/  , I discussed future value and annuity of hajj payment. The assumption of interest (inflation) is 10%. Next step, I have to find out what kind of investment instrument I should choose to get interest more than 10%.


Step 2 – “FEASIBLE alternatives”
Nowadays many investment instruments offered by bank or asset management company, such as:
1. Stocks
2. Property
3. Gold
4. Schroder USD Bond Fund

In my case, I prefer comparing Mutual funds and Gold, because stocks & property investment require huge amount of money & experience. I will use data of Schroder’s product, which is dollar investment product.

Step 3- Develop the outcomes for each alternative (minimum 2)

Historical data for Mutual Funds and Gold listed below. I also projected the value to the future (2018) and present (2013).

*Gold; One troy ounce is currently defined as exactly 0.0311034768 kg or 31.1034768 g

Step 4- Selection of the acceptable criteria.

Find out which investment instrument gives interest (i) more than 10%

PW = PW of cash inflows – PW of cash outflows

Investment Instrument: Gold

PW = 0 = -$1,231.88 + $2,956.76 (P/F, i’, 5)

i’ = ?

At

i’ = 15%

PW     = -$1,231.88 + $2,956.76 (0.4972)

= $238.23

Since the PW is positive at 15%, we know that i’ > 15%

i‘ = 20%

PW     = -$1,231.88 + $2,956.76 (0.4019)

= -$43.55

Now we know that 15% < i’ < 20%

Using interpolation to find i’ :

Line BA/ Line BC = Line dA/ Line de

(20% – 15%) / ($238.23 – (-$43.55)) = (i% – 15%) / (238.23 – 0)

(5% / 281.78) = (i% – 15%) / (238.23)

i’ = 19.2%

i’ > MARR, economical justified

Investment Instrument: Mutual Fund

PW = 0 = -$1.77 + $2.44 (P/F, i’, 5)

i’ = ?

At

i = 6%

PW     = -$1.77 + $2.44 (0.7473)

= $0.06

Since the PW is positive at 6%, we know that i’ > 6%

i = 7%

PW     = -$-$1.77 + $2.44 (0.713)

= -$0.03

i’ < MARR , Not economical justified

Step 5- Analysis/ Comparison of the Alternatives against the Criteria

From calculation above, i’ from Gold bigger than MARR (10%), so it explain Gold have interest more than inflation rate per year.

But not for Mutual Fund, i’ is
lower than MARR, below inflation rate. Investing dollar in this product may not be enough to cover inflation rate.

Step 6- Selection of the Best/ Preferred Alternative Compared against the Criteria

Investing in gold can lead me to a higher amount of money in the end of my investment of 5 years.

Step 7- Performance Monitoring and Post Evaluation of Result/ Follow up Assessment

I need to buy gold every year in some grams that is equal to my investment needed from my blog post week 2: USD 1,187.1 Per year.

REFERENCES

Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Chapter 4 The Time Value of Money and Chapter 5 Evaluating a Single Project. In Engineering Economy (15th ed., pp 104-177 and pp. 178-225). Upper Saddle River, N.J: Prentice Hall.

Westney, Ricahrd E, (1997). The Engineer Cost Handbook. 1st ed. New York: Marcel Dekker, Inc. .

World Gold Council (2013). Gold price in a range of currencies since December 1978 XLS version. [ONLINE] Available at: http://www.gold.org/download/value/stats/statistics/xls/gold_prices.xls. [Last Accessed 13 September 2013].

Schroders (2013). Schroder USD Bond Fund. [ONLINE] Available at: http://www.schroders.com/indonesia/fund-centre/prices-and-performance?p=details&code=IDN000049707&sc=2357. [Last Accessed 16 September 2013].

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3 Comments

Filed under Week 03, Wirawan ASP

3 responses to “W3.1_WAS_Choosing Investment Instrument for Hajj Payment

  1. OK, MUCH better job this time around. You took a great case study and now made into a highly professional and complete analysis!!! Great work!!!!

    Keep more like this coming and you should have no problems passing the tough “Part 2” questions on the AACE exam…..

    BR,
    PDG, Jakarta

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