1. Problem Definition.
Last week’s post was about selecting between two alternatives using qualitative Multi attribute decision making tool. A more quantitative approach is considered in this blog using Future Value (FV).
2. Identify the Feasible Alternative.
The two alternatives stand, they are as the following;
- Outsource the project to SME entrepreneur
- In-house the project
3. Development of the Outcome for Alternative
As explained in W2 blog, cost can be broken down to the following elements, see Table1. Values are in Omani Rials.
Table1: Alternatives and correspondent attributes
For the purpose of this document, a 20-year project life is considered and 10% interest rate assumed. Results of calculating the FV over 20 years are shown in Table2 below.
Table2: Weight estimate of each attribute relative to the option
4. Selection of the Acceptable Criteria.
Since this project is a mere cost for the company, option with lowest FV to be selected
5. Analysis and Comparison of the Alternatives.
As it can be seen from Table2, outsourcing the project will result in much lower initial investment than if in-housed. However, low capital cost leads to higher operating expenditures.
It is clear from Table2 that In-house option is a better option in terms of (FV).
6. Selection of the Preferred Alternative.
It is obvious that the “boat project” to be done in-house.
7. Performance Monitoring and the Post Evaluation of Result.
A proper WBS to be put for boat manufacturer in order to avoid any change orders that could result in very high initial investment. A realistic schedule should also be developed considering this item can be a long lead one. Fuel prices shall also be monitored closely as price may rise in the future.
- The Present Value and Future Value of Money, Retrieved on June 17, 2014, from http://thismatter.com/money/investments/present-value-future-value-of-money.htm
- Times of Oman, Oman Petrol Prices could Rise Under Proposals to Reduce Energy Subsidy, Retrieved on June 17, 2014, from http://www.timesofoman.com/news/Article-30621.aspx
- Finance Formulas, Future Value, Retrieved on June 17, 2014, from http://www.financeformulas.net/Future_Value.html