Investment Proposal Analysis for Desklib

The article provides an analysis of two investment proposals for Desklib. It explains the risk, return, liquidity, time value of money, market demand and investor profiling. The conclusion suggests that the choice of investment plan depends on the risk acceptance and financial objectives of the investor.

ANALYZING THE CASE STUDY
Mr. Edward has a total fund of SGD 1.5 million which he wants to invest. He is interested in two
proposals.
Proposal 1: In this proposal Mr. Edward has to invest in Company Y which specialises in the
marketing of investments in energy related assets such as oil fields and gas extractions. The
maximum period for investment recommended is 5 years. The expected rate of return is 3%
which is payable quarterly. Investors have the option to roll-over their investments either only
the principle or principle along with the return paid for the previous quarter. The minimum
investment amount is SGD 50000.
Proposal 2: In this proposal, Mr. Edward has to invest his fund with Bank Z ltd in a
discretionary investment management account. The growth potential is at a rate of 5% -15% p.a.
Mr. Edward’s funds will be invested in a diversified portfolio comprising of 10% local stock,
10% cash deposit and foreign currencies, 70% bonds and 10% of foreign stocks including US,
EU and Japan. The minimum fund investment accepted for such an account is SGD 1 million
and has no minimum investment time period except if the investor wants to terminate the
Discretionary Investment Management account a minimum of 1 month is required as the notice
period.
ANALYSIS OF PROPOSAL 1 AND PROPOSAL 2
 RISK AND RETURN
Return is the gain or loss from an investment in a particular period depending on the amount of
risk taken by the investor. Low risk signifies low return and high risk is associated higher return
potential. Therefore, risk and return are directly proportional to each other. Proposal 1 has a fixed
return of 3% per quarter which means 12% p.a.
Proposal 2 has a variable return. The return varies between 5% to 15%. Now 5% return means a
low return which means that the risk associated with it is also low. In proposal 2, the bank is
investing Mr. Edward’s fund in different proportions such as 70% for bond, 10% for local
security, 10% for cash deposits and 10% for foreign securities. If Mr. Edward is a risk evader
then he will choose a safer, low risk plan. If we consider bonds as government bonds, then we
can say that bonds are the safest to invest. This means that the bonds have the lowest risk
amongst the 4. In that case, we can assume that the bonds have the lowest rate of return which
means bonds will have a return of 5%. If we assume that the other 3 have a high risk then the
maximum rate of return possible is 15%.
Now let us compare the rate of return of proposal 2 with proposal 1. SGD 12 is the return earned
if SGD 100 is the fund for a year at the rate of 12% in proposal 1. In proposal 2, the return
earned from local security, cash deposit and foreign security in a year if the total fund is

considered to be SGD 100 would be SGD 1.5 each which makes it SGD 4.5. Now, to be equal to
proposal 1, the return earned from the bonds should be (12-4.5)= SGD 7.5 which means that
bond should have a rate of 10.71% p.a. But since bond is considered to be a low risk option,
therefore, it is not possible to have high return on bond. Thus, the total earning from proposal 2
can be considered to be lower than proposal 1.
Here, proposal 2 is at a low risk situation for that reason the earing is also low. Where as
Proposal 1 is at a high risk scenario so the return is also high. If Mr. Edward is a risk taker then
he should choose proposal 1. Where as, if he is a risk evader, if he wants his money to be safe
then he should choose a low risky proposal i.e. Proposal 2.
 LIQUIDITY
As per the case, Proposal 1 has a five year investment locking period. That is the fund invested
by Mr. Edward would be locked for 5 years in Y company. Where as, in proposal 2, the
investment locking period is only 1 month. Mr. Edward can terminate his account by giving a
notice 1 month prior. Therefore, Proposal 2 is more liquid than Proposal 1.
 TIME VALUE OF MONEY
Time value of money means that any money or fund available at present has a higher value than
the same amount available at a future date since there is an opportunity cost such as a potential
gain on interest associated with the money.
If the annual return is higher than the inflation index then the inflation index needs to be
considered. But if the annual return and inflation index are equal then over a period of time the
return does not hold any importance. Since inflation is present, therefore the value of money
diminishes over a period of time. This will effect the proposal 1. Compounding value of interest
after 5 years will be an absolute figure and not a real figure. The real figure must be based on its
present inflation index.
 MARKET DEMAND AND SUPPLY
Market demand and supply is a very important decision in case of local stock. Demand and
supply affects the local stock. To invest in stocks, Mr. Edward has to be a risk taker or should be
able to bear risk.
 INVESTOR PROFILING
Investor profiling is an important process in choosing the most suitable investment for any
investor as it identifies his unique characteristics and requirements. While profiling the
investment for Mr. Edward the above factors should be considered. The risk, return, liquidity,
time value of money, market demand as explained above should be considered.

CONCLUSION
The answer to which proposal should be chosen depends on the risk acceptance and the financial
objectives of Mr. Edward. A general rule is that if the risk tolerance is low, the amount of fund
that should be alloted to the fixed assets should be high (Hagstrom, 2013). This means that if Mr.
Edward is not a risk taker but a risk evader than he should not choose a proposal that envolves
some kind of risk (Gitman, Smart & Joehnk, 2009). Here, in proposal 1 the minimum investment
amount is only SGD 5000 but for proposal 2 it is 1 million. Proposal 2 is at a low risk than
proposal 1. So if Mr. Edward is not ready to risk his fund then he should choose proposal 2 and
vice versa. (Keir, Sawyer & Tissot, 2012).

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