- 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.
- Development of feasible alternatives
There are some common alternatives to collect more money and you can still doing your job such as:
- Purchasing gold
- Investing in property
- Investing in stock market
- Education Insurance
In the first three alternatives need more initial investment/cash, so it would be hard for me. But I still analyze and compare all of the alternatives to get more option.
- Development the outcome for each alternative
To choose the best alternative I will use Interest Rate of Return (IRR) Method and External Rate of Return (ERR) to compare all the alternatives. I still use IRR Method because it more common economical parameter and usually use in my company. ERR Method is the new one and has two basic advantages over IRR:
- It usually be solved for directly, without needing to resort to trial and error
- It is not subject to the possibility of multiple rates of return.
- Selection of criteria
Decision rule of IRR and ERR method is Alternative will be feasible if IRR and ERR value greater than MARR 4.93% (in Indonesia we usually use BI Rate). So in this evaluation I will eliminate alternative with IRR and ERR value less than BI Rate, because it not economically feasible.
- Analysis and comparison of the alternative
This calculation using data as below (Data of Purchasing Gold, Investing in Property, and Investing in Stock Market using colleague’s experience):
Table 1. Alternatives Data
Figure 1. Formula
Each IRR and ERR of alternatives table comparison are show below:
Table 2. IRR Calculation
Table 3. ERR Calculation
IRR and ERR of alternative purchasing gold is less than MARR, so this alternative can be eliminated.
- Alternative selection
Base on calculation alternative investing in Property is preferred to choose because it gives the highest value in IRR and ERR Method. It would give me more option to choose the best university of my daughter.
- Performance monitoring & Post Evaluation Result
All the alternatives have some risk and also assumptions change so I must to identify and mitigate them, but I still believe in quote “High risk high return”.
- Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 5 – Evaluating a Single Project., pp.210-263.
- Mind Tools. (2017). Net Present Value (NPV) and Internal Rate of Return (IRR). Retrieved from https://www.mindtools.com/pages/article/newTED_74.htm
- Axa Mandiri. (2017). Asuransi Mandiri Sejahtera Cerdas. Retrieved from https://www.axa-mandiri.co.id/produk/asuransi-pendidikan/
- 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