**W8_Hassan Albarrami_ (NPV)**

**Problem Definition**

NPV is a powerful technique which used to know how much the money in future worth today. For instant $10000 today does not equal the same amount after 3 years, in fact it worth more in future and this because of investment and interest rate along that period. The figure below illustrates the idea.

Figure 1 Present value and Future value

I have taken 130000 OMR loan (invested in construction building) from the bank with interest rate of 0.5 % for 25 years. In this blog NPV will be used to find out the visibility of this project.

**Identify the Feasible Alternative**

Either to go ahead with the project (the project is visible) or to cancel the project (the project is not visible).

**Selection Criteria**

NPV >0 accept the project

NPV<0 reject the project

**Analysis and Comparison of the Alternative**

** **

Present Value

The above equation [1] is the one we used to calculate Present Value (PV) where :

PV: Present Value

FV: Future Value

i: interest rate

n : number of periods

The table below shows the inflow and out flow of the cash along the period of 25 years

Table 1 project cash flow

Where out flow is the yearly installment paid to the bank, inflow is the money gained from renting the building.

**Selection of the Preferred Alternative**

It is clear from the table that NPV= 151093.4606 OMR which mean the project is acceptable

**Performance Monitoring and the Post Evaluation of Result**

As the inflow calculations are estimated here it is recommended Using Delphi Technique with P (90) to estimate the expected rent income.

**Reference**

- Investopedia
* , Understanding The Time Value Of Money,* Retrieved on 27.07.2014 from http://www.investopedia.com/articles/03/082703.asp

- ehow
*, How to Calculate NPV and IRR* , Retrieved on 27.07.2014 from http://www.ehow.com/how_6746269_calculate-npv-irr.html

- Businessdictionary,
* net present value (NPV),* Retrieved on 27.07.2014 from *http://www.businessdictionary.com/definition/expected-monetary-value.html*

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*Related*

OUTSTSANDING job, Hassan……. You picked an appropriate case study and your NPV analysis was fine.

What I would like to challenge you to do is take the same case study but this time, calculate BOTH the IRR and ERR for this project. See if it is still a good or wise investment?

BR,

Dr. PDG, Jakarta, Indonesia