**W11_Hassan Albarrami_ (IRR,ERR,MARR)**

** **

**Problem Definition**

Continue talking about my construction building projects mentioned in W8, W9 and W10 blogs, this time I’m going to take a portfolio of projects (5 no# from my W2.1 blog ) and then rank order them by IRR and ERR . The projects in the portfolio which are not satisfying the hurdle rates (MARR) should be killed off. Just like I mentioned in W2.1 blog the idea is to construct a Building of 12 apartments in one of the following locations in Salalah (two have been added)

- Okad
- New Salalah
- Saadah
- Taqa
- Marbat

**Identify the Feasible Alternative**

Either to go ahead with the project (ERR > MARR), and IRR >0, or to cancel the project (ERR< MARR) or IRR<0.

Where; MARR is the minimum attractive rate of return. MARR was calculated by one of my collages as stated below (1).

For the most risky project

MARR = 12.81%

For the least risky project

MARR = 8.62%

This time I would say MARR=8.62 % (hurdle rate)

**Development of the outcome for alternative**

Okad | New Salalah | Saadah | Taqa | Marbat | |

land cost | 35000 | 70000 | 50000 | 20000 | 15000 |

building cost | 130000 | 135000 | 137000 | 140000 | 145000 |

annual incom | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 0 | -165000 | -205000 | -187000 | -160000 | -160000 |

Year 1 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 2 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 3 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 4 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 5 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 6 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 7 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 8 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 9 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 10 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 11 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 12 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 13 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 14 | 25000 | 36000 | 28000 | 21000 | 18000 |

Year 15 | 25000 | 36000 | 28000 | 21000 | 18000 |

IRR | 13% | 16% | 12% | 10% | 7% |

out flow PV | 165000 | 205000 | 187000 | 160000 | 160000 |

inflow FV | 539464.0897 | 776828.2892 | 604199.78 | 453149.84 | 388414.14 |

1.082177682 | 1.092877315 | 1.0813242 | 1.0718684 | 1.0609095 | |

ERR | 8.22 | 9.29 | 8.13 | 7.19 | 6.09 |

Table.1 IRR and ERR calculation with interest rate of 5%

**Selection Criteria**

The project will be accepted if ERR> MARR and IRR>0

**Analysis and Comparison of the Alternative**

It is clear from the table above that all projects are getting IRR>0, but projects ERR as following :

Marbat | 6.09 |

Taqa | 7.19 |

Saadah | 8.13 |

Okad | 8.22 |

New Salalah | 9.29 |

**Selection of the Preferred Alternative**

Only new Salalah project satasfy both IRR>0 and ERR > 8.62 % hence the project is accepted

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

It is recommended to apply both methods in future to be more confidant before starting any project as ERR is more powerfull method.

**Reference**

- PMI-Oman 2014
*, W5_AlShehhi_Calculating MARR Using Analytical Hierarchy Methodology,*Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/07/09/w5_alshehhi_calculating-marr-using-analytical-hierarchy-methodology/#more-1172 - PMI-Oman 2014
*, W9_Hassan Albarrami_ (IRR),*Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/08/02/w9_hassan-albarrami_-irr/ - Iinvestopedia
*, Internal Rate Of Return – IRR*on 11.08.2014 from http://www.investopedia.com/terms/i/irr.asp - Planwithintegrity
*, Internal Rate of Return (IRR), External Rate of Return (ERR) and What Matters Most,*Retrieved on 11.08.2014 fromhttp://www.planwithintegrity.com/internal-rate-of-return-irr-external-rate-of-return-err-and-what-matters-most/ - PMI-Oman 2014
*, W9_Hassan Albarrami_ (ERR),*Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/08/07/w9_hassan-albarrami_-err/ - PMI-Oman 2014
*, W2.1_Hassan Albarrami_Project location selection,*Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/author/sulmanhassan/page/2/

EXCELLENT case study, Hassan but your analysis forgot one key important element…. What about OPERATING costs?

Not only do those reduce your gross income but I seriously doubt the operating costs are going to be the same in ALL the locations?

Anyway, aside from that, your case study and your analysis was excellent but I would urge you to REDO this for your W12 blog posting and see what impact deducting the operating costs has on your analysis.

BR,

Dr. PDG, Jakarta

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