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investmentproject.doc

  1. 1. Cost Analysis Investment Analysis Project CGN 4101 April 18th, 2005 Andrew Liby
  2. 2. Andrew Liby Investment Analysis Project Background Investments have been fruitful in the recent months as the nation regains confidence in the economy and fights the rising costs of goods and services due to the increased cost of oil. The investments for this project were chosen for the purpose of evaluating the truth behind advertised returns on investments, and thus were not deemed as the best investments for the situation. While technology stocks seem to be a safe investment, stock in automobile companies, in a time of rising gasoline costs, may not. Beyond company stocks there are many other choices of investments, of which I chose to explore mutual funds, certificates of deposit, and money market accounts. These three investments are typically low risk and fluctuate with the market as a whole. They are all good choices for an investor who does not want all of his or her eggs in one basket or likes to take less risk. Other popular investments which were not evaluated in this project include: bonds, real estate trusts, and commodity futures. Though most bonds have an intriguing interest rate, the majority of them have a long maturity life. I felt that though bonds would be an excellent investment in today’s economy, the losses due to early buyout penalties would skew the data and misrepresent their return in such a short time period. Real estate trusts and commodity futures are both exciting investments in today’s economy. Real estate prices continue to drastically increase, especially in Florida. Commodity futures can be very profitable investments. However my experience has shown that only the active trader would want to track the fast paced returns. This project should reveal the truth behind advertised returns as well as an overview of today’s market. First Investment Choice: Stock in Apple Computer, Incorporated Background: Apple Computer, Incorporated This investment is offered by Apple Computer, Incorporated. This company has been in existence since January 3rd, 1977 and revolutionized the computer world with the creation of Apple II. A decade later the company continued to change the world of personal computing with Macintosh. Apple released the iMac concept, including the iMac and iBook, which is responsible for surge in sales in the past decade. In the last five years apple has also released the OS X operating system, the world popular iPOD: for Apple and PC users alike, and continues to release new application suites including iLife and iWork. The Apple OS X platform has a history of popularity in the graphics and multimedia industry, and continues to convert PC users alike. Justification Investment Selection Apple Computers, Incorporated is a well established company and surging in sales as the popularity of its products continues to increase. Their stock is being closely monitored by many investment firms; most of which encourage investors to buy. Apple’s recent increase in stock price forced a two-for-one split in order to bring the price down and encourage buyers who could not previously afford the stock. Therefore it should be noted that at he time to sell the investments, I owned twice as many shares of Apple. My
  3. 3. Andrew Liby Investment Analysis Project investment in this company was a result of a combination of their mentioned history and my personal interest to support the company. Investment Comparison When compared to the stock market, Apple Computer, Incorporated recorded on average a higher percentage growth in the last few years. When compared to Ford Motor Company, Apple Computer, Incorporated recently posted higher stock increases than Ford and during the time period of this assignment, proved to be a much better investment decision. When compared to the Vanguard Emerging Markets Stock Index Fund, Apple is a slightly riskier investment, because of the nature of a mutual fund. When compared to a Certificate of Deposit or Money Market Fund, it is again a much higher risk investment due to the nature of the two of these investments. Second Investment Choice: Stock in Ford Motor Company Background: Ford Motor Company This investment is offered by Ford Motor Company. This company has been in existence since June 16th 1903. When Henry Ford establish his business practices he revolutionized the way businesses operated, and we continue to follow his methods to this day. Ford Motor Company is one of the largest vehicle manufacturers in the world, producing multiple vehicle brands including: Ford, Jaguar, Lincoln, Mercury, Mazda, Volvo, Land Rover, and Aston Martin. Recent urges for the United States to purchase American made products and an increased interest in SUVs has helped Ford continue to dominate the market in nearly all vehicle classes. Unfortunately in the past few months, Ford acquired a faulty component to their cruise control devise, causing the component to ignite the closely located brake fluid reservoir, and resulting in fire to the vehicle. As time went by, it appears the value in the stock has decreased with its consumer’s confidence in its vehicles. In my opinion Ford will rebound after this issue is resolved and continue to attract consumers to their wide product line. Justification Investment Selection The investment in Ford stock was primarily based on personal interests, as I drive an F-150. Their stock was affordable, and I felt that Ford is a stable and reliable company to invest in. Ironically, I myself fell victim to the unfortunate event of having my truck explode in my driveway during this project. Though I suffered minor personal losses, I am again driving an F-150- one with the cruise control disengaged until the replacement part becomes available. Many times I considered selling my stock, however I held onto it due to its relatively inexpensive price compared to Apple. Investment Comparison When compared to the stock market, Ford Motor Company is a relatively stable investment and low risk. Their recent re-release of the thunderbird, and this year’s product lines appear to be popular with consumers and should prove to be financially a rewarding year. On the other hand, rising gasoline costs could prove to damage Ford’s
  4. 4. Andrew Liby Investment Analysis Project expected returns. As previously mentioned stock in Ford is relatively inexpensive when compared to Apple Computer, Incorporated. The value per share of Ford stock is 20% of the value of Apple stock. When comparing the risk, Ford’s established market appears more stable than the much younger Apple. Compared to the Vanguard Emerging Markets Stock Index Fund, Ford is a slightly riskier investment, because of the nature of a mutual fund. When compared to a Certificate of Deposit or Money Market Fund, it is again a much higher risk investment due to the nature of the two of these investments. Third Investment Choice: Vanguard Emerging Markets Stock Index Fund Background: The Vanguard Group, Incorporated This investment is offered by The Vanguard Group, Incorporated. This company has been in existence since May 1st, 1975. It boasts $750 billion in U.S. Mutual funds, comprised of 126 domestic funds, and 35 funds in international markets. Vanguard has a history of innovating funds, including: the first bond index fund for retail investors, the first international stock index funds, and first series of tax managed funds in the investment community. Justification Investment Selection The investment in Vanguard Emerging Markets Stock Index Fund appeared to be a reliable fund based on its previous history and the strength of the market. The fund concentrates on the performance of companies in emerging markets which should always net a positive margin. My grandparents are responsible for introducing me to Vanguard. They choose Vanguard for their investments and seem relatively satisfied. Vanguard also had one of the least expensive transaction costs. This was important to me because of the short length of time to invest. Investment Comparison When compared to mutual funds, the Vanguard Emerging Markets Stock Index Fund seems to have performed similarly to the rest of the market. When compared to Apple, the Vanguard Fund appeared to be much more stable, yet probably less profitable because of Apple’s recent performance history. When compared to Ford, I predicted the Vanguard Fund to perform similarly. I saw both the Vanguard Fund and Ford performing similarly to the market average. When compared to a Certificate of Deposit or Money Market Fund, it is a higher risk investment due to the nature of the two of these investments. However, this risk is much lower than comparing a single stock to these investments. Fourth and Fifth Investment Choice: Bank of America: Certificate of Deposit and Money Market Fund Background: Bank of America This investment is offered by Bank of America. This company has a long history of investments, credit and leasing for many famous projects, of which a few include: The
  5. 5. Andrew Liby Investment Analysis Project Golden Gate Bridge (during the Great Depression), Walt Disney’s Disneyland, and many motion pictures including Gone with the Wind and Snow White and the Seven Dwarves. Bank of America continuously sponsors athletics including the Olympics and Major League Baseball. The company is considered by many to be a top performing financial institution and place to work. Fourth Investment Choice: Bank of America Certificate of Deposit Justification Investment Selection The investment in a Bank of America certificate of deposit was a result of my current personal banking choices. My father is retired from the military, which maintains a branch of Bank of America for military officers and enlisted soldiers. The bank continues to offer competitive rates for their certificates of deposit with low fees. I chose a Bank of America certificate of deposit because of my satisfaction with the bank’s returns in the past, and their option to move money between accounts. Investment Comparison When compared to other certificates of deposit, it appeared that Bank of America offered the same investment stability as other popular financial institutions. A certificate of deposit is a low risk investment. When compared to stock in Apple or Ford, the certificate of deposit is much more stable and reliable. Certificates of deposits have smaller fluctuations in rates and offer less risk. When compared to the Vanguard Fund, the certificate of deposit is again more stable and reliable. When compared to a money market fund, the certificate of deposit offers slightly better rate due to the time period associated with the certificate of deposit. Fifth Investment Choice: Bank of America Money Market Fund Justification Investment Selection The investment in a Bank of America money market fund followed the same logic as their certificate of deposit. Specifically I chose to invest a little bit more money and create a money market account, rather than create a typical savings account. The money market account asks for a higher investment, which I could afford by sacrificing some of the money I planned on investing in a certificate of deposit. In the past I have been pleased with my relationship as a customer of a similar account. I also enjoyed knowing that if the rates for the certificate of deposit increased, I could choose to convert this account to a savings account with a lower minimum investment, and transfer more funds to the certificate of deposit. Investment Comparison When compared to other money market funds, Bank of America offered competitive rates, and I could open an account without charge. A money market fund nets a slightly higher rate than a typical savings account, but a lower rate than a certificate of deposit. When compared to stock in Apple or Ford or the Vanguard Fund, there is relatively no
  6. 6. Andrew Liby Investment Analysis Project risk in this investment. The account is insured by the federal government and through Bank of America, a well established financial institution.
  7. 7. Andrew Liby Investment Analysis Project INVESTMENT CATEGORY: STOCK Company Offering Investment: Apple Computer, Inc. Contact Information: 1-800-275-2273; www.apple.com Investment Name: Publicly Traded Stock Ticker Symbol: AAPL Share Price: $69.80 per share Shares: 100 (200 after 2-for-1 split) Risk Level: Medium risk. Expenses: $19.99 commission to buy, $3.00 handling fee if fewer than 9 trades per quarter. $14.99 to sell. Investment Objective: Emphasis on good return on a short term investment which should continue to increase as the company releases new products during the investment period. Return History: 1 Year: 141.30% (See Exhibit A) 3 Year: 41.41% 5 Year: 4.80% Actual Return: 1 Year: 215.55% (See ROR Calculations and Exhibit A) 2 Year: 514.44% 3 Year: 246.57% Last 3 Months: 21.18% Reference: www.etrade.com, www.apple.com, www.smithbarney.com, finance.yahoo.com Name: Andrew Liby
  8. 8. Andrew Liby Investment Analysis Project INVESTMENT CATEGORY: STOCK Company Offering Investment: Ford Motor Company Contact Information: 1-800-555-5259; www.ford.com Investment Name: Publicly Traded Stock Ticker Symbol: F Share Price: $14.08 per share Shares: 200 Risk Level: Medium risk. Expenses: $19.99 commission to buy, $3.00 handling fee if fewer than 9 trades per quarter. $14.99 to sell. Investment Objective: Emphasis on good return on a short term investment with an established company of which I support their products. Return History: 1 Year: -25.53% (See Exhibit B) 3 Year: -11.41% 5 Year: Not Available Last 3 Months: -34.62% Actual Return: 1 Year: -18.27% (See ROR Calculations and Exhibit B) 2 Year: 45.44% 3 Year: -22.71% Last 3 Months: -22.24% Reference: www.etrade.com, www.ford.com, www.smithbarney.com, finance.yahoo.com Name: Andrew Liby
  9. 9. Andrew Liby Investment Analysis Project INVESTMENT CATEGORY: MUTUAL FUND (NO LOAD) Company Offering Investment: The Vanguard Group, Incorporated Contact Information: 1-800-871-3879; www.vanguard.com Investment Name: Vanguard Emerging Markets Stock Index Fund Ticker Symbol: VEIEX Share Price: $14.16 per share Shares: 706.215 Minimum Investment: $3000.00 Minimum Time: Less than two months incurs fee. Risk Level: Low risk. Total Operating Expense %: .50% fee at purchase and redemption; $10 account maintenance fee if balance is below $10000. Investment / Asset Type / Allocation: The fund takes an indexing approach and invests approximately 95% of the funds assets in approximately 595 common stocks and bonds of companies in the Select Emerging Markets Index. Investment Objective: Emphasis on good return on a short term inexpensive investment. Return History: 1 Year: 24.88% (See Exhibit D and Prospectus) 3 Year: 22.15% 5 Year: 5.11% 10 Year: 5.10% Since Inception (5/4/1994): 5.70% Actual Return: 1 Year: 14.51% (See ROR Calculations and Exhibit D) 2 Year: 101.54% 3 Year: 67.22% Last 3 Months: 5.02% Reference: www.vanguard.com, finance.yahoo.com Name: Andrew Liby
  10. 10. Andrew Liby Investment Analysis Project INVESTMENT CATEGORY: CERTIFICATE OF DEPOSIT Company Offering Investment: Bank of America Contact Information: 1-800-900-9000; www.bankofamerica.com Investment Name: Certificate of Deposit Minimum Investment: $1000 @ Interest Rate: .95%; APY: .95% Minimum Time: 90 Days Maturity: 1 Year Risk Level: Very Low Expenses: No charges so long as CD not terminated early. Investment Amount: $2401.02 Investment / Asset Type / Allocation: Certificate of Deposit / Interest Rate: .95% compounded and credited monthly / Bank of America. Investment Objective: Emphasis on stable and positive, predictable return with minimal risk. Return History: Bank of America does not provide this information. Actual Return: 1 Year: .95% (See ROR Calculations and Exhibit G) 2 Year: 1.92% 3 Year: 2.89% Last 3 Months: .24% Reference: www.bankofamerica.com Name: Andrew Liby
  11. 11. Andrew Liby Investment Analysis Project INVESTMENT CATEGORY: MONEY MARKET FUND Company Offering Investment: Bank of America Contact Information: 1-800-900-9000; www.bankofamerica.com Investment Name: Money Market Savings Account Minimum Investment: $1000; $2500.00 to avoid monthly maintenance fee. Minimum Time: None Risk Level: Very low. Expenses: No charges to open fund. Investment Amount: $2500.00 Investment / Asset Type / Allocation: Money Market Fund / Interest Rate: .50% compounded and credited monthly / Bank of America. Investment Objective: Emphasis on stable and positive, predictable return. No expense to deposit or withdraw. Return History: Bank of America does not provide this information. Actual Return: 1 Year: .50% (See ROR Calculations and Exhibit H) 2 Year: 1.01% 3 Year: 1.02% Last 3 Months: .125% Reference: www.bankofamerica.com Name: Andrew Liby
  12. 12. Andrew Liby Investment Analysis Project ROR Calculations First Investment Choice: Stock in Apple Computer, Incorporated 3 Month: ROR=($43.74*200shares-$22.99)/ ($71.85*100+$14.99)-1=21.18% 2004: ROR=($43.74*200shares-$22.99)/ ($27.5*100shares+$14.99)-1=215.55% 2003: ROR=($43.74*200shares-$22.99)/ ($14.05*100shares+$14.99)-1=514.44% 2002: ROR=($43.74*200shares-$22.99)/ ($25.03*100shares+$14.99)-1=246.57% *3-Month and Annual F, D, C and P values are highlighted on attached pages marked Exhibits A & C. (3-Month) F: Exhibit A, page 2, midpage; D: Exhibit A, page 2, midpage; C: Exhibit C, pages 1 & 3, midpage; P: Exhibit A, page 1, midpage. (Annual) F & P: Exhibit A, page 3. Second Investment Choice: Stock in Ford Motor Company 3 Month: ROR=($11.03*200shares-$22.99+$0.10*200shares)/ ($14.09*200shares+ $14.99)-1=-22.24% 2004: ROR=($11.03*200shares-$22.99+4*$0.10*200shares)/ ($13.77*200shares+ $14.99)-1=-18.27% 2003: ROR=($11.03*200shares-$22.99+8*$0.10*200shares)/ ($7.98*200shares+ $14.99)-1=45.44% 2002: ROR=($11.03*200shares-$22.99+12*$0.10*200shares)/ ($15.6*200shares+ $14.99)-1=-22.71% *3-Month and Annual F, D, C and P values are highlighted on attached pages marked Exhibits B & C. (3-month) F: Exhibit B, page 2, midpage; D: Exhibit B, page 2, midpage; C: Exhibit C, pages 1 & 3, midpage; P: Exhibit B, page 1, midpage. (Annual) F, P & D: Exhibit B, pages 3-4. Third Investment Choice: Vanguard Emerging Markets Stock Index Fund 3 Month: ROR=($15.02*706.215shares-.005*$15.02*706.215shares)/ ($14.16*706.215shares+.005*$14.16*706.215shares)-1=5.02% 2004: ROR=($15.02*706.215shares-.005*$15.02*706.215shares+ $.259*706.215shares-.005*$.259*706.215shares)/ ($13.21*706.215shares+.005*$13.21*706.215shares)-1=14.51% 2003: ROR=($15.02*706.215shares-.005*$15.02*706.215shares+$ (.259+.172)*706.215shares-.005*$(.259+.172)*706.215shares)/ ($7.59*706.215shares+.005*$7.59*706.215shares)-1=101.54% 2002: ROR=($15.02*706.215shares-.005*$15.02*706.215shares+$ (.259*+.172+.122)*706.215shares-.005*$
  13. 13. Andrew Liby Investment Analysis Project (.259+.172+.122)*706.215shares)/ ($9.22*706.215shares+.005*$9.22*706.215shares)-1=67.22% *3-Month and annual F, D, C and P values are highlighted on attached pages marked Exhibits D & F. F: Exhibit D, page 3, midpage; D: Exhibit D, page 5; C: Exhibit D, pages 1 & 3, bottom of page, Exhibit F, page 1, bottom of page & 6, top of page; P: Exhibit D, page 1, midpage, page 5. *Annual F, D, C and P values from attached Prospectus (Exhibit E) are highlighted on page 11. Fourth Investment Choice: Bank of America Certificate of Deposit 3 Month: ROR=(2401.02*1.0023769)/2401.02-1= .24% 2004: ROR=(2401.02*1.0095415)/2401.02-1= .95% 2003: ROR=(2401.02*1.0191740)/2401.02-1= 1.92% 2002: ROR=(2401.02*1.0288984)/2401.02-1= 2.89% *3-Month and annual F, D, C and P values are highlighted on attached pages marked Exhibit G. F, D & C: Exhibit G, page 2, midpage; P: Exhibit G, page 1, midpage. Fifth Investment Choice: Bank of America Money Market Fund 3 Month: ROR=(2500*1.0012505)/2500-1= .125% 2004: ROR=(2500*1.0050118)/2500-1= .50% 2003: ROR=(2500*1.0100481)/2500-1= 1.01% 2002: ROR=(2500*1.0151099)/2500-1= 1.02% *3-Month and annual F, D, C and P values are highlighted on attached pages marked Exhibit H. F, D, C & P: Exhibit H, page 1, midpage. (D (true value): Exhibit H, page 3, midpage. (Note: ROR calculations for Money Market Fund based on interest rate of .50% on 1/13/05. The interest rate increased to .60% during the project period, but the date of the change is unknown. Therefore the interest rate used in the above calculations is based solely on the initial interest rate.)

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