Net Worth Time Series: Single Source of Income Versus Multi Source of Income

A person's net worth can be plotted in time series. Type of the time series plot can be characterized as below:

A) Robot Asimo - Staircase Type

Asimo works hard to earn steady monthly salary. Due to robot never spend any single penny (or, maybe do not know how to spend), the net worth pattern shall be look like a staircase type.

Characteristic: No human being is classified into this category. But, it shows that it is the maximum amount that one can earn from this single source of income for the rest of the life time.

B) Mr. Savi - Uptrend Saw-Type

Mr. Savi awares about the saving is important. Thus, he works hard to increase his net worth through his single source of income, most likely it is through the employment.

Characteristic: Consumption Outflow lesser than Monthly Salary Inflow

C) Ms. Balanec - Flat Saw-Type

Ms. Balanec seems to know well about the balance of spending and earning perfectly. Perhaps, she has no trust on financial planning. Spend all as per earned. She really knows how to enjoy life...young.

Characteristic: Consumption Outflow same as Monthly Salary Inflow

D) Mr. Brooke - Downtrend Saw-Type

Mr. Brooke believes in today money more worth than tomorrow, so he spends it all using his future money from credit card. How to finance his high consumption outflow? Perhaps, his father is rich...very rich.

Characteristic: Consumption Outflow higher than Monthly Salary Inflow

E) Ms. Exponen - Escalating Staircase Type

Ms. Exponen works and has developed passive incomes or another stream of active incomes.

Characteristic: Consumption Outflow is offset by multi source of  income that generates exponential effect growth from the existing net worth. Due to the effect of strong inflow, she has no worry on her basic/fixed month expenses.

What is your time series pattern?

Every success starts with a hard way, always.
This is the actual time series pattern which I just started my plan. The execution is hard but it is not an impossible task.

After years, the trend changes to exponential or higher linear growth trend. It is the results of
1) increasing the capability of inflow,
2) use the increased amount of inflow to buy appreciating asset,
3) reduce liability, and
4) controlled outflow.

It is as simple as ABC, just the matter of the cashflow management. But, how many people can do that?

REIT and Shop Lot Investment in Malaysia

Mr. E intends to invest in property after he receives an amount of sum assured from his deceased father's life insurance. With his own parent taught since his childhood, properties investment is the best investment vehicle that he can park his money in. Net receivable of the sum assured is RM100,000. Mr. E believes in conventional way to invest it in such way to "own" a shop physically at somewhere in the town. However, his wife receives information about REIT from his securities broker.  
 
REIT in Malaysia is not popular, even their DY (dividend yield) recorded 7% - 8% p.a. recently. This is due to limited appreciation of the stock value itself, around 4% p.a. It is about 13 REITs listed in Bursa Malaysia.

Case Study#1: Invest RM100,000 directly to "own" a 2-storey-shop lot at KL

Assumption:

Net rental income is the gross rental income of RM7,000 offset with taxes and maintenance, said RM6,000.

Case Study#2: Invest RM100,000 in REIT

Assumption:

1) dividend per unit paid in semiannual

2) dividend per unit growth at 5% p.a.

3) Capital appreciation at 5% p.a.

Finding:

Case Study#1:

IRR = 22.62% p.a.

NPV@6.5%p.a. = RM1,114,452.25 (Accepted)

Pro/con: 1) consistence monthly rental income that can against inflation, 2) Psychologically "own" the shop, feel more secure, 3) low liquidity, 4) Higher cost (lawyer fees etc), 5) higher return, 6) high maintenance, 7) committed to loan servicing  

Case Study#2:

IRR = 10.28% p.a.

NPV@3.25%p.a. = RM255,567.73 (Accepted)

Pro/con: 1) consistence semi annual dividend income that can against inflation, 2) liquidity very high, switch to other investment vehicle easier, 3) low brokerage fees, 4) lower return, 5) less maintenance, 6) No commitment

Present Value Evaluation (DDM) by using my expected return at 15% p.a.
Case Study#1:
P=D,o(1+g)/(r-g) = 12*6000(1+0.04)/(0.15-0.04) = RM680,727.30 (Assume freehold property)
Case Study#2:
P=D,o(1+g)/(r-g) = 2*2500(1+0.05)/(0.15-0.05) = RM52,500

CPA, CFA Or CFP - Pick Your Abbreviation Carefully (Diverted From Investopedia)

A very good article about the best known professional designations in the financial industry, CPA, CFA and CFP. Three alphabets is short, to most Malaysian, it is really confusing. This is the article which I took from Investopedia which written by Daniel Myers. I am a CFP holder, I am considering to take my CFA in my near furture..


Whether you're searching for a good career path or just curious about the different financial credentials, this article will help guide you through three of the best known professional designations in the financial industry: Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Each of these three has a core career focus, and although their abbreviations often sound interchangeable, each designation gives you something unique. Follow along to discover how much coursework and study each designation requires, what careers they typically lead to and how much you could make. (For a basic breakdown on these designations and more, check out The Alphabet Soup Of Financial Certifications.)


Certified Public Accountant (CPA)
For most people, a CPA is best known as the person who prepares tax returns. CPAs certainly do that, but they do much more as well. A CPA license is legally required in order to do particular jobs, such as public accounting (independent auditing). However, one does not require a CPA license in order to prepare tax returns. State laws govern what CPAs can and cannot do with their license. (If you're looking for a good accountant, check out Crunch The Numbers To Find The Ideal Accountant.)


Requirements: Requirements vary by state, but in general, in order to sit for the CPA exam, applicants must have a bachelor's degree with 120 semester hours. To obtain the CPA designation, applicants must pass the Uniform CPA Exam, gain relevant work experience and meet additional educational requirements. Overall, additional educational requirements usually consist of 24-30 semester hours in accounting, earned through a graduate or bachelor's degree in business. Many states also require a minimum number of one to two years accounting and/or auditing experience.


Aside from the experience requirements, a CPA license usually takes about 18 months to complete beyond the educational requirements. Many students choose to pursue a masters degree in accounting to fulfill their educational requirements.


Exam: Although classroom requirements are a major requirement, the CPA exam is a difficult task in its own right. Exams are administrated by the American Institute of Certified Public Accountants, the governing body of CPAs in the United States. The 14-hour computerized exam consists of four sections:

1. Auditing and attestation
2. Financial accounting and reporting
3. Regulation
4. Business environment and concepts

Careers: Many undergraduate accounting students receive job offers long before they graduate. Accounting is an in-demand field and is projected to continue to be so. According to the U.S. Bureau of Labor Statistics, employment is projected to grow 18% between 2006 and 2016; this amounts to nearly 226,000 new positions. For CPAs wishing to advance to senior-level corporate positions, two to three years of experience at a major accounting firm is crucial.


For those seeking gainful employment but not wishing to climb the corporate ladder, there are numerous positions available in every city for accountants at small accounting firms and practices. For more ambitious job seekers, lucrative CPA positions are available in hedge fund accounting and Sarbanes-Oxley-related work. The chief requirements for these positions are experience and an excellent educational background. (To learn the history of the accounting profession, check out The Rise Of The Modern-Day Bean Counter.)


Chartered Financial Analyst (CFA)The CFA reputation in the business community is world class, and CFA charterholders work in many countries around the world. The CFA program is very broad, and might be more aptly described as the equivalent of a master's degree in finance with accompanying minors in accounting, economics, statistical analysis and portfolio management. Although the CFA designation is not a legal requirement to perform work as a financial analyst (the cornerstone CFA job), it is a great way to get a foot in the door for one of the most difficult jobs to crack. (For more on the pros and cons of this demanding designation, see So You Want To Earn Your CFA? and Becoming A Financial Analyst.)


By reputation, the best way to get a finance job on Wall Street is to get a Master of Business Administration degree from one of a handful of exclusive schools including Wharton, Harvard and Stanford. The second best way is to earn the CFA charter and have good industry experience. In some instances a CFA designation is even held in higher esteem than an MBA.


Requirements: The CFA designation (granted by the CFA Institute) earns its reputation mainly due to the grueling process candidates must endure to earn the CFA charter. While the exam is very democratic and open to anyone with a bachelor's degree, the only people with a realistic chance of passing are those who are serious about the field. The three general requirements to earn a CFA charter are to pass three exams, have an undergraduate degree (in any subject) and have three years related work experience in the financial area.

 
Exam: To earn the CFA charter, candidates must pass a six-hour exam for each of three levels. The first exam is available twice per year (in June and December) and the next two are only available in June. The pass rates on the three tests are slightly above 50%, so if you don't pass the second or third exam, you must wait one year to take it again.


Each of the three tests has overlapping material such as ethics and financial analysis. Generally, though, the first test covers broad financial principles, the second is a very intensive exam on financial analysis and accounting, and the third exam covers portfolio management and decision making. (For more on surviving your CFA exams see, Pass Your CFA Exams The First Time.)


Careers: According to the CFA Institute, 55% of charterholders work for institutional investors as in-house analysts, 15% work for broker-dealers, and the remaining 29% work for universities and the government. While not nearly as numerous as CPA jobs, CFA-related jobs are perhaps more lucrative. CFA Institute's 2007 Member Compensation Survey reports that the median compensation for an equity portfolio manager with less than five years of experience is $495,000. With over 10 years experience, the median yearly salary went up to $555,000.


Certified Financial Planner (CFP)The Certified Financial Planner (CFP) is the only designation of the three focused on investing. It provides an extremely practical course of study for those wishing to work directly with individual investors. The focus of the CFP is to train financial advisors to create and implement financial plans for investors.


Requirements and Exam: The requirements for the CFP, as specified by the CFP Board of Standards, are a bachelor's degree in any major, three years financial planning experience, other educational requirements (see below) and an exam. The 10-hour exam covers the following: investments planning, insurance, estate planning, risk management, tax and retirement planning.


In order to take the exam, one must complete a prescribed course of study - unless exempt - in relevant financial planning areas. These six required courses take about nine months to complete and are conducted on college campuses nationally. They are:

1. Financial planning: process and environment
2. Fundamentals of insurance planning
3. Income taxation
4. Planning for retirement needs
5. Investments
6. Fundamentals of estate planning

Careers: People who benefit the most from the CFP designation are those who usually work directly with individual clients. Opportunities exist nationally for people with the CFP, but it is not necessarily a key to a high-paying job, as opposed to the CPA designation. There is no typical salary with the CFP, as it helps gain client credibility in what is essentially an entrepreneurial position. Income potential is determined by the sales performance of the financial consultant, not by a salary scale. (If you aren't sure financial planning is for you, check out the quiz in Is A Career In Financial Planning In Your Future?)


Parting ThoughtsOf the three designations, only the CPA is governed by state laws (to protect the public interest). In choosing a designation to pursue, ask yourself what kind of work you want to do, where you want to work, and if you want to work as an employee with a guaranteed salary or an entrepreneur where the sky (and the basement) is the limit. No matter which you choose, each of these three financial designations will provide ample professional opportunities for those who spend the time and energy to earn them.


Written by Daniel Myers,CFA.

Application of NPV and IRR in Renewable Energy In Malaysia

Not many engineers aware about IRR/NPV method is the best way to make the decision for the project.
Luckily, I am a chemical engineer, who gained the basic knowledge of NPV and IRR via Economy Process offered by my university during my undergraduate study.

As an engineering manager, we have to make a lot of decision about the feasibility of the project. From finance point of view, expected return or finance cost for every single that the company invested shall be fruitfully produce the profit to the company.

I am not going to talk about NPV or IRR calculation here, I believe that I have discussed sufficiently in my previous chapter. Thus, the main focus here is the decision making mechanism from the calculated IRR, NPV and SPB.

Investment Exit plan - Decision Making Via XIRR and XNPV

Miss K bought company G share about four years ago. Over years, she received dividend from company G semi annually. However, share price has no significant increase. Its range from RM6 to RM8. She has no idea on the calculation of the return of investment. Indecisively, she does not know how to make the move from it.

a) what is the CAGR of the share G investment? loss and gain?
b) does the invest worth to be kept if we take finance cost as the risk free rate of 4%p.a.?
c) does the invest worth to be kept if our expected rate is targeted as 15%p.a.?
d) if she wants to realize the loss/gain by taking finance cost as the risk free rate of 4%p.a. CAGR, what is the selling price for share G?

Solution:

Step 1: Tabulate the net cashflow in time series.
Step 2: Take the market value base on today price - make it liquidate by today (+ve sign)

a) what is the CAGR of the share G investment? loss and gain? 

Step 3:  Function XIRR is used to calculate CAGR. 1.31% gain p.a. is obtained, but it is lower than the risk free rate 4% p.a. The return 1.31% is bench-marked with 4% e.g. MGS or simply make it as 4% p.a. for fix deposit return.

b) does the invest worth to be kept if we take finance cost as the risk free rate of 4%p.a.?

Step 4: Function XNPV is used to make the investment feasibility. Positive NPV leads to make the decision to accept the project while negative NPV leads to reject the project. For the 4% p.a. benchmarking, the project has the net present value of -RM1041. Thus, we reject the project. So we should not keep the investment. We should realize the loss.

c) does the invest worth to be kept if our expected rate is targeted as 15%p.a.?

Step 5: For the 15% p.a. benchmarking, the project has the net present value of -RM3997. Thus, we reject the project. So we should not keep the investment. We should realize the loss. 15% p.a. is my favorite CAGR investment return. It is used to gauge my investment performance.

For those who had gone through the retirement and children education planning, desired return from the planning is used to benchmark the investment share G performance. For instance, Miss K desired an investment of CAGR 6% p.a., then she should use 6% to replace 15%.

d) if she wants to realize the loss/gain by taking finance cost as the risk free rate of 4%p.a. CAGR, what is the selling price for share G?
Step 6: Excel Solver is used to calculate liquidation price by fixing CAGR at 4% p.a. Thus, she should sell the company G at least higher than RM7.86 without suffer any loss.

See, as simple as ABC.

EPF Withdrawal for Unit Trust Investment Study

Calculate Investment Withdrawal

You must have more than the required Basic Savings in your Account 1 to become eligible to apply for the EPF's investment withdrawal.

In addition, the amount to be withdrawn must not be less than RM1,000 and not more that 20 per cent of the amount exceeding the required Basic Savings in Account 1.

You can make further withdrawals, for investment purposes, at three-month intervals as long as you meet the eligibility criteria each time you wish to make a new investment.

Investment withdrawals can be made every 3 months after the date of the last application is approved, subject to the availability of the required balance in Account 1.

Reference: www.kwsp.gov.my

You might be approached by UT agent about the EPF scheme for the EPF approved fund investment. So, is it a right decision to withdraw it for the investment? Can it really make money?

Case Study#1: Without Withdrawal

Total: $133,576.24

Case Study#2: With the Withdrawal - Investors
How about the EPF withdrawal for investors (5.5% commission applied)?

 

Total: $134,435.39

Case Study#3: With the Withdrawal - Agent
How about the EPF withdrawal for Agent (assume reinvestment for the 2.75% obtained commission with 8%p.a. fund return)?

Total: $134,435.39+$946.84 =$135,382.23

Conclusion:
By assuming unit trust fund return is 8% p.a.
Case Study#1's return: 12*RATE(12,-2300,-100000,133576.24)=5.19%
Case Study#2's Return: 12*RATE(12,-2300,-100000,134435.39)=5.91%
Case Study#3's Return: 12*RATE(12,-2300,-100000,135382.23)=6.71%

Emm... Case study#2 and 3's return is not much different from Case study#1 for first year, but the effort of implementing the withdrawal is (6.71-5.19)/5.19 = 29.29% increment.

Time Value of Money in Excel (Basic)

E1: What would the interest amount and principal plus interest be for a
loan of $1,500 borrowed for 90 days at an annual rate of 7.25%?
Use the 360-day mode and two decimal places.

Simple Interest: (7.25%*(90/360))*1500 = 27.19
Simple interest + Principal: (1+7.25%*(90/360))*1500 = 1527.19.



E2: Calculate the interest rate required to increase a principal of $10,000
to $12,000 in three years, when compounding is performed semiannually.

Compound Interest: (period of compounding per year)*RATE(Total compounding time,PMT,PV,FV,TYPE)

Annual Rate: 2*RATE(2*3,0,-10000,12000,0) = 6.17% p.a.


E3: Calculate the interest rate required to have a $2,500 balance in an
installment savings account in two years when $100 is deposited each
month and interest is compounded semiannually.

Compound Interest: EFFECT((period of compounding per year)*RATE(Total compounding time,PMT,PV,FV,TYPE),compounding per year)

Annual Rate: EFFECT(12*RATE(2*12,-100,0,2500,0),2) = 4.28% p.a.


E4: Calculate the interest rate required to repay a $2,300 balance on a loan
in two years paying back $100 per month, when interest is compounded
monthly.

Annual Rate: 12*RATE(2*12,-100,2300,0,0) = 4.11% p.a.


E5: Calculate the interest rate required to repay a $2,500 balance on a loan
in two years (24 installments) paying back $100 per month and a final
$200 installment, when interest is compounded monthly.

Annual Rate: 12*RATE(2*12,-100,2500,-200,0) = 3.54% p.a.

E6: Calculate the future value after 7.6 years for a principal of $500 and an
interest rate of 6%, compounded annually.

Future Value: FV(6%,7.6,0,-500,0) = $778.56.

E7: Calculate the principal required at 5.5%, compounded monthly, to
produce a total of $20,000 in a year.

Present Value: PV(5.5%/12,12,0,20000,0) = -$18,932.08

E8: Calculate the interest required, compounded monthly, to produce a
total of $10,000 in 10 years on an initial investment of $6,000.

Annual Rate: 12*RATE(10*12,0,-6000,10000,0) = 5.12% p.a.

E9: Calculate the amount of time required to increase an initial investment
of $5,000 to a total of $10,000 at an annual rate of 4%, compounded
monthly.

NPER: NPER(4%/12,0,-5000,10000,0)/12 = 17.35 years

E10: Calculate (to two decimal places) the principal plus interest for $250
monthly installments for five years at 6% annual interest, compounded
monthly.
Calculate amounts for when installments are made at the beginning of
each month and at the end of each month.

Future Value (End Mode): FV(6%/12,5*12,-250,0,0) = $17,442.51
Future Value (Begin Mode): FV(6%/12,5*12,-250,0,1) = $17,529.72

E11: Calculate the amount required for each installment to accumulate a
total of $10,000 in 5 years at an annual interest rate of 6%,
compounded semiannually.

PMT: PMT(EFFECT(6%,2)/12,5*12,0,10000,0) = -$143

E12: Calculate the number of monthly $84 installments required to
accumulate a total of $6,000 at an annual interest rate of 6%,
compounded annually.

NPER: NPER(6%/12,-84,0,6000,0) = 62 monthly installment

E13: Calculate the principal plus interest after one year for an installment
savings account with an interest rate of 4.5%, compounded monthly,
opened with an initial deposit of $1,000, with $500 installments added
each month.

Future Value: FV(4.5%/12,12,-500,-1000,0) = $7,171.25

E14: Calculate how much can be borrowed on a 15-year loan at a 7.5%
annual interest rate, compounded monthly, if a payment of $450 per
month can be made.

Present Value: PV(7.5%/12,15*12,-450,0,0) = $48,543.04

E15: Calculate the size of the monthly installment for a 25-year $300,000
home loan made at 6.2%, compounded semiannually.

PMT: PMT(EFFECT(6.2%,2)/12,25*12,300000,0,0) = -$1,987.57

E16: Calculate the number of installments it will take to repay a $60,000
loan borrowed at 5.5%, compounded monthly, with monthly
installments of $840.

Period: NPER(EFFECT(5.5%,12)/12,-840,60000,0,0) = 87 months

E17: Calculate (to two decimal places) the effective interest rate
compounded monthly, on a 25-year $65,000 loan repaid with $460
monthly installments.

Effective Interest: 12*RATE(25*12,-460,65000,0,0) = 7.01%

E18: An investment of $86,000 in machinery projects the annual revenues
shown in the table below (all revenues realized at the end of the fiscal
year). What is the net present value of this investment if the useful
service life of the machine is six years, the resale value after six years
is $14,000, and the capital cost is 11%?

Year Revenues
1 –5,000
2 42,000
3 31,000
4 24,000
5 23,000
6 12,000 + 14,000

Method 1:
-86000
-5000
42000
31000
24000
23000
26000
$9,610.16 =NPV(11%,-5000,42000,31000,24000,23000,26000)+(-86000)

Due to Excel’s NPV doesn’t really calculate NPV, so Method 2: XNPV is always to be used.

1-Jan-10 -86000
1-Jan-11 -5000
1-Jan-12 42000
1-Jan-13 31000
1-Jan-14 24000
1-Jan-15 23000
1-Jan-16 26000
$9,591.28 =XNPV(11%,C11:C17,B11:B17)

E19: Calculate the monthly installment due on a $140,000 15-year home
mortgage at an annual rate of 6.5%, compounded semiannually.
Also calculate PRN and INT for the second year (24th installment),
BAL for installment 49, and ΣINT, ΣPRN for installments 24 through 49.

PMT: PMT(EFFECT(6.5%,2)/12,15*12,-140000,0) = $1,227.69
INT,24: ISPMT(EFFECT(6.5%,2)/12,24,12*15,-140000)= $667.90
PRN,24: 1227.69-667.90 = $559.79
BAL,49: FV(EFFECT(6.5%,2)/12,49,1227.69,-140000) = $114,374.60
ΣINT,24-49: CUMIPMT(EFFECT(6.5%,2)/12,15*12,140000,24,49,0) = -$17468.01
ΣPRN,24-49: CUMPRINC(EFFECT(6.5%,2)/12,15*12,140000,24,49,0) = -$14452.04

E20: Calculate (to two decimal places) the effective interest rate for an
account paying an interest rate of 12%, compounded quarterly.
Effective Rate: EFFECT(12%,4) = 12.55%

E21: Calculate the annual percentage rate for an account paying an
effective interest rate of 12.55%, compounded quarterly.
Annual Percentage Rate: NOMINAL(12.55%,4) = 11.99%