W8_Hassan Albarrami_ (NPV)


W8_Hassan Albarrami_ (NPV)

 

  1. 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.

2

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.

  1. 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).

  1. Selection Criteria

NPV >0   accept the project

NPV<0     reject the project

  1. Analysis and Comparison of the Alternative

 3

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

1

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.

 

  1. Selection of the Preferred Alternative

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

  1. 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

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

 

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

 

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

 

 

 

 

Advertisements

One thought on “W8_Hassan Albarrami_ (NPV)

  1. 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

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s