W12_Hassan Albarrami_ (IRR,ERR,MARR) (2)


 

W12_Hassan Albarrami_ (IRR,ERR,MARR)

 

  1. Problem Definition

Continue exploring IRR,ERR and MARR discussed in my previous blog (W11). The portfolio of projects (5 no#) were ranked by IRR and ERR and we ended with only one location which can satisfy the hurdle rate. in this blog we are going to do the same but taking the operating cost in consideration. As the idea is to construct a Building of 12 apartments, my experience the average operating cost for an apartment in Salalah is around 30 OMR per month (electricity and water) .

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
operating cost cash flow operating cost cash flow operating cost cash flow operating cost cash flow operating cost cash flow
Year 0 -165000 -4320 -169320 -205000 -4320 -209320 -187000 -4320 -191320 -160000 -4320 -164320 -160000 -4320 -164320
Year 1 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 2 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 3 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 4 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 5 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 6 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 7 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 8 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 9 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 10 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 11 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 12 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 13 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 14 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
Year 15 25000 -4320 20680 36000 -4320 31680 28000 -4320 23680 21000 -4320 16680 18000 -4320 13680
IRR 9% 13% 9% 6% 3%
npv -864 -864 -864 -864 -864
out flow PV 165864 205864 187864 160864 160864
inflow FV 539464.0897 776828.2892 604199.78 453149.835 388414.145
  1.081800955 1.092570932 1.08099197 1.07148361 1.06052867
ERR 8.18 9.26 8.10 7.15 6.05

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 still are getting IRR>0, and projects ERR as following :

Marbat 6.05
Taqa 7.15
Saadah 8.10
Okad 8.18
New Salalah 9.26

 

  1. Selection of the Preferred Alternative

Even though the operating cost considered here is around 4320 OMR per year , still New Salalah project is satisfying 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 and to catch up all incomes and all costs to have rational analyses for your project visibility.

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/
  7. PMI-Oman 2014 , W11_Hassan Albarrami_ (IRR,ERR,MARR), Retrieved on 11.08.2014 from https://pmioman14.wordpress.com/2014/08/11/w11_hassan-albarrami_-irrerrmarr/

 

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2 thoughts on “W12_Hassan Albarrami_ (IRR,ERR,MARR) (2)

  1. AWESOME…….!!!!! Just doesn’t get any better than this……!!!

    Keep up the great work but what I’d really like to see is this same kind of highly professional effort put into getting the weekly report set up and running.

    Why? Because once you master the use of applied Earned Value, it becomes VERY easy to adapt the template I’ve given you to your real life projects……

    Bottom line- it will be well worth your time and effort to master the use of all the earned value tools……

    BR,
    Dr. PDG, Jakarta

  2. Pingback: W10 _Said Alamri_ Investment Decision based on NPV (part two: IRR, ERR&MARR Comparison) | PMI-Oman 2014

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