W2_IBRAHEEM_LONG TERM SAVINGS VERSUS REAL ESTATE

Problem definition:

In intend to make a comparative analysis on either building for commercial purpose (rent) or personal living home. This will define the return from investment in terms of futuristic monetary benefit as a commercial building and comfort/expenses incurred as a living home.

This analysis is based on an average salary of 700,000 naira per month

Feasible alternative:

The feasible alternatives are as follows:

1.       Build 40rooms chalet accommodation

2.       Saving plan stretched over 5years from received salary

Develop the outcome for each alternative:

Analysis of feasible alternative 1 (Building a 40rooms chalet for commercial purpose)

		Cost (N)				O	P	M
S/N	Activity Description	Mean	SD	Variance	90th Perc.
1	Purchase of landed property (3Plots)	5,083,333	250,000	500	5,405,833	4500000	6000000	5000000
2	Documentation, survey and other legal fees	508,333	25,000	158	540,583	450000	600000	500000
3	Foundation works	3,000,000	166,667	408	3,215,000	2500000	3500000	3000000
4	Block work from ground floor	300,000	20,000	141	325,800	240000	360000	300000
5	Block work on first floor	300,000	20,000	141	325,800	240000	360000	300000
6	First floor beam and other iron works	3,550,000	150,000	387	3,743,500	3000000	3900000	3600000
7	Roofing	3,300,000	100,000	316	3,429,000	3000000	3600000	3300000
8	Plastering and finishing	5,500,000	166,667	408	5,715,000	5000000	6000000	5500000
9	Tiling and Painting works	2,530,000	76,667	277	2,628,900	2300000	2760000	2530000
10	Doors, Bath and Kitchen items	1,760,000	53,333	231	1,828,800	1600000	1920000	1760000
				TOTAL	27,158,217

Table 1.0

Market value from feasibility studies indicates an annual income of N6, 000,000 per annum from alternative 1 above.

Analysis of feasible alternative 2 (continuous savings over 5 years on an interest rate of 2% per annum)

	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5
JAN	450000	5409000	10467180	15626524	20889054
FEB	900000	5859000	10917180	16076524	21339054
MAR	1350000	6309000	11367180	16526524	21789054
APR	1800000	6759000	11817180	16976524	22239054
MAY	2250000	7209000	12267180	17426524	22689054
JUN	2700000	7659000	12717180	17876524	23139054
JUL	3150000	8109000	13167180	18326524	23589054
AUG	3600000	8559000	13617180	18776524	24039054
SEP	4050000	9009000	14067180	19226524	24489054
OCT	4500000	9459000	14517180	19676524	24939054
NOV	4950000	9909000	14967180	20126524	25389054
DEC	5400000	10359000	15417180	20576524	25839054

 Table 2.0

Table above indicate a total amount of 25,839,054 Naira saved over 5years.

Calculating inflation rate using consumer price index, 100dollars=107.48 USD between 2008 and 2012.

This is equivalent of a 0.9factor of depreciation. Before the fuel subsidy removal inflation rate was hovering at 10.3 percent in December 2011. While in January it etched up to 12.6 percent and Central Bank of Nigeria (CBN) predicted that inflation rate would reach up to 14.5 to 15 percent this year before it moderates to 10 percent in 2013.

Fig. 1.0

Graphical representation above indicates a spike in inflation rate between 1990 and 1996 amounting to 60% increase. A surprise spike is a common feature of an unstable economy. Taking a mean value of 20% inflation over 5years as it affects the savings and the purchasing power of naira on alternative 2:

TOTAL SAVINGS (N) AT YR 5	DEPRECIATION (N)	VALUE OF SAVING AT YR 5 (N)
25,839,054	5,167,811	20,671,243

 Table 3.0

Acceptable Criteria:

Acceptable criteria will be based on justification on which of the two alternatives brings appreciable returns on investment.

Analysis and Comparison of alternatives:

From table 3.0 above indicate a monetary loss which amounts to 5m Nigeria Naira as a result of inflation while return from investment on erection of commercial building on alternative 1 amounts to 6m Nigerian Naira

Selection of preferred alternative:

Erection of a building for commercial purpose is more attractive from analysis above. Payback time is within 5 to 6years.

Performance Monitoring & Post Evaluation of result:

I will continue evaluating the effect on inflation on money in the bank and investment on real estate to justify selection of my preferred alternative

References:

Nigeria's inflation rate at 11.9% and CBN retains interest rate at 12%

Retrieved from http://www.afripol.org/afripol/item/569-nigerias-inflation-rate-at-119-and-cbn-retains-interest-rate-at-12.html

U.S. Bureau of Labor Statistics. Databases, Tables & Calculators by Subject

Retrieved from http://www.bls.gov/data/inflation_calculator.htm

Emeka, C. (2012). Nigeria: Inflation spikes, Naira recoils and T-bills sell continues

Retrieved from http://www.afripol.org/emeka-chiakwelu/item/601-nigeria-inflation-spikes-naira-recoils-and-t-bills-sell-continues.html