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
 

2 thoughts on “W5_UDS_ Education Insurance Or Saving”

  1. Hmmmmm…. Pak Dhanu, you picked a very real and appropriate case study but WHERE did you get your feasible alternatives?

    What about investing in the stock market? Or purchasing gold or silver? Or investing in property?

    Also why did you pick only IRR and not ERR? For the purposes of preparing for your AACE/GPC exams I would STRONGLY urge you to take this same topic and create another blog but this time add in a few more FEASIBLE ALTERNATIVES and also use not only IRR but ERR as well. Be sure to explain to us what the advantages of using ERR are over using IRR.

    Then when you go back to work next week, maybe suggest to your management that they too would be better off to add in the ERR calculations to their decision making tool kit?

    BR,
    Dr. PDG, Jakarta

     
  2. PS be sure to claim credit for using the tools/techniques from Chapter 5 for your Problem Project. Just be careful in how you allocate the time as you were able to get credit for two projects because you worked smart, not hard…..

    BR,
    Dr. PDG, Jakarta

     

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