W5_UDS_ Education Insurance Or Saving

  1. Problem Evaluation

I have two years old daughter, I want her to be a doctor. To become a good doctor she should study in the best university and it must be expensive. From Now I need to choose strategy to collect more money for her education especially in university.

  1. Development of feasible alternatives

There are three alternative to collect more money for her study:

  • Saving
  • Education Insurance A (EI-A)
  • Education Insurance B (EI-B)
  1. Development the outcome for each alternative

To choose the best alternative I will use Interest Rate of Return (IRR) Method for compares two Education Insurance Alternatives. After that I will compare the selected Education Insurance with saving alternative using Net Present Value (NPV) Method. IRR Method is very use full and fair in comparing two alternative that have different condition such as period, premium, and benefit. NPV Method I use to compare value of money each alternative in present years.

  1. Selection of criteria

The Rule of thumb in IRR method is Alternative will be feasible if IRR value greater than bank interest (in Indonesia we usually use BI Rate). So in this evaluation I will eliminate alternative with IRR value less than BI Rate, because it not economically feasible.

  1. Analysis and comparison of the alternative

This calculation using data as below:

  • Interest rate (i) 4.93% (BI 7-Day Rate)
  • EI-A Period (n) 15 years
  • EI-B Period (n) 21 years
  • Annual insurance EI-A IDR 12,500,000
  • Annual insurance EI-B IDR 17,368,500
  • Benefit EI-A in 15th years IDR 465,400,000
  • Benefit EI-B
    • In 13th years IDR 75,000,000
    • In 16th years IDR 150,000,000
    • In 21st years IDR 75,000,000

Each IRR and PV of alternatives table comparison are show below:

Tabel 1. IRR Calculation

Tabel 2. PV Calculation

IRR of Education Insurance B is less than Bank interest, so this alternative can be eliminated.

  1. Alternative selection

Base on PV calculation Education Insurance A is preferred to choose because it gives the highest value of PV and it would give me more option to choose the best university of my daughter.

  1. Performance monitoring & Post Evaluation Result

The alternatives especially education insurance has a term and condition in some situation and assumption, so we need to look more detail and extra analysis to acquire a better conclusion.

References

  1. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 5 – Evaluating a Single Project., pp.210-263.
  2. Mind Tools. (2017). Net Present Value (NPV) and Internal Rate of Return (IRR). Retrieved from https://www.mindtools.com/pages/article/newTED_74.htm
  3. Axa Mandiri. (2017). Asuransi Mandiri Sejahtera Cerdas. Retrieved from https://www.axa-mandiri.co.id/produk/asuransi-pendidikan/
  4. Panin Dai-ichi Life. (2017). Asuransi Pendidikan. Retrieved from https://www.panindai-ichilife.co.id/id/asuransi-pendidikan
  5. Bank of Indonesia. (2017). BI 7-day (Reverse) Repo Rate. Retrieved from http://www.bi.go.id/en/moneter/bi-7day-RR/data/Contents/Default.aspx
 

W5_OAN_Comparison of Depreciation Methods

  1. Problem Definition

As NOC, storage tank is our main asset. We plan to build a 10.000 Kl storage tank, it will cost $ 1.300.000. The asset will be used for 20 years, and the SV at the end of useful life is $ 65.000.

In this week blog posting, Author wants to know the best depreciation method for the company, in order to reduce our income tax.

  1. Development of Feasible Alternatives

Alternatives for depreciation method are:

  1. Option 1 : Straight Line (SL) method
  2. Option 2 : Declining-Balance (DB) method
  3. Option 3 : DB with Switchover to SL Depreciation
  4. Option 4 : Sum of the Year Digits (SYD) method
  5. Option 5 : Modified Accelerated Cost Recovery System (MACRS)

3. Possible Solution

Option 1: SL Method

In this method, we assumes a constant amount is depreciated each year over the useful life of the asset.

Table 1 : SL Method

Option 2: DB Method Using 150% DB Equations

 

DB Method assumes the annual cost of depreciation is fix percentage of the BV at the beginning of the year.

Table 2: DB Method

Option 3: DB with Switchover to SL Depreciation

DB with Switch over to SL Depreciation assumes that the DB Method never reaches a BV of zero; it is permissible to switch from DB to the SL method so that an asset’s BV will be zero (or some other determined amount such as its SV at year k).

Table 3: DB with Switchover to SL

Option 4: Sum of the Year Digits (SYD) method

SYD methods assume that assets are generally more productive when they are new and their productivity decreases as they become old.

Table 4: SYD Method

Option 5: MACRS Method

MACRS is unique to the United States Tax Code. Depreciation rates are set by percentages allowed under the U.S. Tax Code.

Based on IRS Publication 946 table B-2, Storage Tank class life is 14 years, and GDS 7 years.

Table 5: MACRS Method

  1. Selection Criteria

Our selection criteria will be the depreciation method that have the biggest impact on reduce taxable income for company.

  1. Analysis and Comparison of the Alternatives

Table 6: Comparison of Depreciation Method

Table 6 shows that the MACRS Method results in a larger share of the depreciation being charged during the earlier years of the asset’s life than others depreciation method.

  1. Selection and Preferred Alternatives

Figure 1: Depreciation Comparison

Depreciation expense will reduce company’s taxable earnings. The larger depreciation expense, the lower taxable income. Those will lower company’s tax payment.

As shown in figure 1, MACRS method generate the biggest depreciation in early years. Therefore, this method will generate the lower taxable income for company.

  1. Performance Monitoring and the Post Evaluation of Result

MACRS method is unique to US Tax code. For Indonesian company, we must exclude MACRS method from our analysis, and use the acceptable depreciation method that follow Tax system in Indonesia.

Refrences

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 7 page 332 – 354, England: Pearson Education Limited.
  2. Module 06-5 Acquiring Equipment for the Project.
    Retrieved from http://www.planningplanet.com/guild/gpccar/acquiring-equipment-for-the-project
  3. Publication 946 : How to Depreciate Property (2016)
    Retrieved from https://www.irs.gov/pub/irs-pdf/p946.pdf
  4. W18_RM_Comparison of Depreciation Methods (2016)
    Retrieved from https://goldenaace2015.wordpress.com/2016/05/13/w18_rm_comparison-of-depreciation-methods/