W5_IBRAHEEM_PREFERRED SAVING PLAN

1.0 Problem definition:  Preferred saving plan.

Home ownership is an important achievement for every family. A salary earner in the civil service with a monthly salary of NGN 350,000 per annum intends to establish a saving plan towards home ownership estimated at NGN3, 000,000 of today money.

2.0 Development of feasible alternative:

15years to retirement and considering the following alternatives:

1. Saving plan over 14years, 25% of salary after tax with 8% interest rate per annum on deposit
2. Saving plan over 10years, 35% of salary after tax with 13% interest rate per annum on deposit

The two alternatives will be scrutinized and real value of dollar at the end of period of analysis will be ascertained. Justification will be made on which savings plan best suit the objective based on CPI (Using Nigeria as a case study)

Following parameter can be deduced from chart below as it applies to Nigerian economy:

Fig 1.0

  

Consumer price index= (Index) _k - (Index) _k-1      Eqn. 1

{(CPI) ₂₀₁₂-(CPI) ₂₀₁₁}/ (CPI) _2011. Substituting figures from fig 1.0 above

(12.3-11.8)/ 11.8 = 8.47%

3.0 Develop the outcome for each alternative:

The two scenarios will be subjected to numerical analysis using spreadsheet method.

Alternative 1

Alternative 2

4.0 Selection of acceptable Criteria:

Acceptable criteria will be based on justification on which of the two alternatives brings appreciable reduction in amount of years and excess money absorbed in the economy due to inflation over prolonged period of time.

5.0 Analysis and Comparison of alternatives:

Subtracting value of actual dollars in the two scenarios i.e. NGN 9,363,533- NGN 6, 767,338= NGN2, 602,595. This indicated a monetary value loss to inflation over extra 4years on alternative 1.

6.0 Selection of preferred alternative:

The most preferred alternative is alternative 2. It may impose a present financial constraint but beneficial on the long run as a reduction on effect of inflation on savings.

7.0 Performance Monitoring & Post Evaluation of result:

Continual monitoring measures to be put in place to evaluate effect of rise and fall of inflation based on consumer performance index as year unfolds.

References:

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15^th ed.) (pp 366-382) New Jersey, NJ. Pearson Higher Education, Inc.

  

Purdue OWL APA style. (2011). APA formatting and style guide. Retrieved from http://owl.english.purdue.edu/owl/resource/560/19/

Trading Economic (2012): Nigeria Inflation Rate. Retrieved from http://www.tradingeconomics.com/nigeria/inflation-cpi