# 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)

• New Salalah
• 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 :

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/