W11_Hassan Albarrami_ (IRR,ERR,MARR)


W11_Hassan Albarrami_ (IRR,ERR,MARR)

 

  1. 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)

  1. 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%

 

  1. Selection Criteria

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

  1. 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

 

  1. Selection of the Preferred Alternative

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

  1. 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

  1. 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
  2. PMI-Oman 2014 , W9_Hassan Albarrami_ (IRR), Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/08/02/w9_hassan-albarrami_-irr/
  3. Iinvestopedia , Internal Rate Of Return – IRR on   11.08.2014 from http://www.investopedia.com/terms/i/irr.asp
  4. 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/
  5. PMI-Oman 2014 , W9_Hassan Albarrami_ (ERR), Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/08/07/w9_hassan-albarrami_-err/
  6. PMI-Oman 2014 , W2.1_Hassan Albarrami_Project location selection, Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/author/sulmanhassan/page/2/

 

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2 thoughts on “W11_Hassan Albarrami_ (IRR,ERR,MARR)

  1. 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

  2. Pingback: W12_Hassan Albarrami_ (IRR,ERR,MARR) (2) | PMI-Oman 2014

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