Saturday, November 21, 2009
Nui – 7th blog
Apply to real life: (Continue from Last week)
From the knowledge from Engineering Economy Chapter 4 and 5,
I use IRR formula from Microsoft Excel to compare between alternative
1. Alternative 1:
Investment in Insurance Company, the good proposal of this insurance is at the 8th year, I can deposit premium and draw back it immediately so this will be advantage for me to pay nothing but can get tax refund of the premium for the rest of insurance year. The last insurance year, the insurance company has given the fixed amount. Below is calculation of insurance alternative with different premium amount and top-up alternative;
2. Alternative 2:
Investment in LTF with condition of holding LTF for 5 calendar years.
For instance, I buy LTF 25,000 THB at the end of year 0 then I can refund tax 20% = 5,000 THB lately by the end of year 1. After of 5 calendar years holding, I can re-sell LTF at the same price at the end of year 4 (Assumption: Buy at end of year 0 and re-sell the beginning of year 5 or equivalent to the end of year 4). Below is my calculation in Microsoft Excel. In order to simulate my investment the same as alternative 1, I will invest LTF for 11 years, with total investment return by 15th year.
The result is No matter how much I invest and how many year I have invest, the result still be the same IRR = 5.40%
Alternative 1, investment in insurance company provides IRR rate range between 4.71% - 5.51%, it is base on amount of money put in insurance company and require to deposit at least 8xpremium amount at least 7 years. The more I put the more I can get the return. This calculation does not include death benefit that I won’t expect to get it.
From the knowledge from Engineering Economy Chapter 4 and 5,
I use IRR formula from Microsoft Excel to compare between alternative
1. Alternative 1:
Investment in Insurance Company, the good proposal of this insurance is at the 8th year, I can deposit premium and draw back it immediately so this will be advantage for me to pay nothing but can get tax refund of the premium for the rest of insurance year. The last insurance year, the insurance company has given the fixed amount. Below is calculation of insurance alternative with different premium amount and top-up alternative;
- Alternative 1.1 (Premium = 25,000 THB and Tax Refund 20% = 5,000 THB)
Pay premium 25,000 THB every year and next premium year can get tax refund 5,000 THB and at the end of 8th year I can draw back my premium (same as not pay anything but can refund tax 5,000 THB every year).
The result is IRR = 4.71
- Alternative 1.2 (Premium = 50,000 THB and Tax Refund 20% = 10,000 THB)
Same as alternative 1.1 but increase premium amount from 25,000 THB to 50,000 THB
The result is IRR = 4.91%
- Alternative 1.3 (Premium = 25,000 THB, Top-up = 25,000 THB and Tax Refund 20% = 10,000 THB)
This alternative base on alternative 1.1 but I pay top-up as premium amount 25,000 THB so the cash out flow is 50,000 THB every year. But at the end of 8th year, I can draw back only premium 25,000 THB not for top-up.
The result is IRR = 5.51%
2. Alternative 2:Investment in LTF with condition of holding LTF for 5 calendar years.
For instance, I buy LTF 25,000 THB at the end of year 0 then I can refund tax 20% = 5,000 THB lately by the end of year 1. After of 5 calendar years holding, I can re-sell LTF at the same price at the end of year 4 (Assumption: Buy at end of year 0 and re-sell the beginning of year 5 or equivalent to the end of year 4). Below is my calculation in Microsoft Excel. In order to simulate my investment the same as alternative 1, I will invest LTF for 11 years, with total investment return by 15th year.
The result is No matter how much I invest and how many year I have invest, the result still be the same IRR = 5.40%
3. Alternative 3: Investment in Bank at 2.75%
Since this already is rate per year so IRR is the same = 2.75%.
4. From above Investment Alternative,
Summary IRR;
Alternative 1, investment in insurance company provides IRR rate range between 4.71% - 5.51%, it is base on amount of money put in insurance company and require to deposit at least 8xpremium amount at least 7 years. The more I put the more I can get the return. This calculation does not include death benefit that I won’t expect to get it.Alternative 2, Investment in LTF provides constant IRR rate at 5.40%. This is require to hold LTF at least 4 years. But it could be more benefit if I can sell LTF at higher price than I buy.
Alternative 3, Deposit in Bank as current interest rate at 2.75%. This is returned the lowest rate as it is the lowest risk from various alternatives.
So I suggest myself to invest in alternative 2 which can provide IRR rate at 5.40%. It is not the highest rate as calculation but the investment per year can be vary as my investment money each year is the remaining from my routine bank deposit. And for the future, I should deposit in bank less and invest more in LTF in order to get higher rate of return.
# posted by Maneesuda (Nui) @ 11/21/2009 04:27:00 PM 
Comments:
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Simply OUTSTANDING, Nui!!! I couldn't ask anymore than this from one of my students. To actually put something you are learning about to work either in your personal world or your business world is the highest honor you can give to a mentor/facilitator.
I would really like to see more examples of this kind from everyone, either in your working world or your personal world.
Keep up the good work, Nui!!
BR,
Dr. PDG, Jakarta
I would really like to see more examples of this kind from everyone, either in your working world or your personal world.
Keep up the good work, Nui!!
BR,
Dr. PDG, Jakarta
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