Performance oriented organization behaviour 1

1. EROSION
OF
EARNINGS
Are we really saving for a rainy
day?

2. Introspection Question
Am I risk adverse?
Am I a risk bold?
Am I risk conscious?

3. Scope
 Using a simple Discounted
Cash Flow Analysis, we will
determine if the portion of your
salary that is input into the
Petrotrin Employee Savings
plan is a viable investment.

4. Discounted Cash Flow
 A valuation method used to estimate the
attractiveness of an investment
opportunity. Discounted cash flow (DCF)
analysis uses future free cash flow
projections and discounts them (most
often using the weighted average cost of
capital) to arrive at a present value, which
is used to evaluate the potential for
investment. If the value arrived at through
DCF analysis is higher than the current
cost of the investment, the opportunity
may be a good one.(investopedia)

5. Methodology
Cash flows = Salary.
Each option would be invested
in Funds A,B and C.
 The option with the highest
buying power figure at year 30
is the most viable.

6. Options
Option Description Employee
Portion (%)
Company
Portion (%)
1 Do Nothing 0 0
2 Save 3% 3 3
3 Save 10% 10 3

7. Funds’ Rate Of Return
Fund Description Rate of
Return(%)
A Fixed
Deposit
2
B Equity 20
C Bonds 7

8. Variables
Salary is $10,000
Number of years is 30
Inflation Rate is 7%
(Budget 2011/12)

9. Assumptions
The non savings portion of salary would
be spent in entirety.
Under each option the employee would
receive the same pension upon
retirement.
No Savings Plan Withdrawals.
Time Value of Money now = 1

10. Present Value(PV) Factor
PV = {1/(1+inflation rate)}
number of years.
PV = (1/1.07)30 = 0.13
$1 @ y0 = 0.13cents @
y30

11. Investment Under Fund A
Option Workings Total
1 ($10,000x12monthsx30years) $3,600,000
2 {($10,000x0.97)(12x30)}=($9,700)(360) $3,492,000
($10,000x0.03)x2 =
{($600)(360)(1.02n)}(0.13)
$ 50,825
$3,542,825
3 {($10,000x0.90)(360)}=($9,000)(360) $3,240,000
{(10,000x0.10)+($300)}=
(1300x360)(1.81)(.13)
$ 110,120
$3,350,120

12. Investment Under Fund B
Option Workings Total
1 ($10,000x12monthsx30years) $3,600,000
2 (9,700)(360) $3,492,000
{($600)(360)(1.20xn)}(0.13) $6,665,630
$10,157,630
3 {($10,000x0.90)(360)}=($9,000)(360) $3,240,000
{(1300x360)(237.38)}(0.13) $14,442,199
$17,682,199

13. Investment Under Fund C
Option Workings Total
1 ($10,000x12monthsx30years) $3,600,000
2 (9,700)(360) $3,492,000
{($7,200x30)(1.07xn)}(0.13) $ 213,689
$3,705,689
3 {($10,000x0.90)(360)}=($9,000)(360) $3,240,000
{(15,600x30)(7.61)}(0.13) $ 462,992
$3,702,992

14. Performance
Option Fund A Fund B Fund C
Do
Nothing
1st 3rd 3rd
Save 3% 2nd 2nd 1st
Save 10% 3rd 1st 2nd
Advice Do
Nothing
Save 10% Save 3%

15. Introspection Link
Risk Fund Option
Adverse A Do
Nothing
Bold B Save 10%
Conscious C Save 3%

16. Discussion

17. FIN