W12_FELIX_GOLD INVESTMENT ANALYSIS

1.      Problem Recognition, Definition and Evaluation

According to engineering economy book, we can become millionaire if we start saving early. And even we are getting old is never too late to start for saving.

In this case I want to save money by investing in gold.

According to London fix historical gold Retrieved from http://www.kitco.com, Gold prices increase per year average 17.46%.

 

Gold investment is relatively safe and also more liquid than other investment. If we want to compare with bank deposit which is only return 6%/year than Gold can return almost 3x higher. But again gold investment is for long term project.

2.      Feasible alternatives

I found three ways to invest in gold.

a.       Buying physical gold directly in gold shop

b.      Buy gold via saving at Bank (Bank Syariah)

c.       Buy gold via Mortgage (Pegadaian)

Using engineering economy we want to analyze which one is more profitable.

3.      The cash flow for each feasible alternatives

Analysis using for 100 gram gold coin/bullion

a.       Buying physical gold which is cost for 100 gram at 4 December 2012 was $5,420

b.      Buy gold via Islamic Bank (Bank Syariah).

According to Bank Account officer the term and condition for buying gold, we should pay initial payment for 20% plus administration cost and the rest we should save by monthly plus saving cost for 4 month.

The cash flow can be shown at below table:

                 

c.       Buy gold via Mortgage (Pegadaian)

The cash Flow can be shown at below table:

                     

4.      Selection of the acceptable criteria.

Using engineering economy we will compare the IRR and annual effective rate from above option.

The bigger IRR than the better investment.

5.      Analysis for the alternatives

Using Ms. Excel spreadsheet we can calculate the proposal as below table:

a.       Buying physical gold which is cost for 100 gram at 4 December 2012 was $5,420

With i = MRR = IRR = 17.46% effective annual interest.

 

b.      Buy gold via Islamic Bank (Bank Syariah).

 

c.       Buy gold via Mortgage (Pegadaian)

 

6.      Select the preferred alternative

Based from above calculation IRR for direct buying is the bigger.

 

So if we have liquid money it is better to buying directly in gold shop, but if you do not have it, you can buy at Bank Syariah which is better than Pegadaian.

7.      Performance Monitoring & Post Evaluation of Result

Performance and the quality of these calculations could be monitor by checking gold price movement by monthly or yearly.

8.      Reference:

·         William G.Sullivan, and Elin M.Wicks (2012)  Engineering Economics-Fifteen Edition, chapter 5, Evaluating Single Project. London Pearson Education Ltd.

·         Charts & data of Gold in Kitco Gold Index. Retrieved from http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

·         Internal Rate Of Return: An Inside Look. In investopedia online. Retrieved from http://www.investopedia.com/articles/07/internal_rate_return

·         Chapter 6 - Investment decisions - Capital budgeting. In FAO Corporate Document Repository online. Retrieved from http://www.fao.org/