W10 _Said Alamri_ Investment Decision based on NPV (part two: IRR, ERR&MARR Comparison)


1. Problem Recognition

With reference to my posted W9 _ Investment Decision based on NPV, management decided to invest 60000 OMR. There were two options: the first option has a return on investment with 1500 OMR per month for 10 years. Second option has return of investment with 3000 OMR per month for 5 years. Both investments have same discount rate of 7%. The second option with five years intervals was selected to be the best investment for that particular situation. In this blog I will do the calculation for IRR,ERR for each investments and verify if the selected investment is still valuable after determining IRR&ERR for the investments and compare it with MARR calculated from W5_AlShehhi [2].

2. Development the Feasible Alternative

 

IF (ERR > MARR), and IRR >0 the investment is still valuable. If (ERR< MARR) or IRR<0 the investment is rejected (doesn’t worth to invest in)

Where; MARR is the minimum attractive rate of return. MARR was calculated by AlShehhi in W5_AlShehhi blog at PMIOman [2]. as stated below :

For the most risky project

MARR = 12.81%

For the least risky project

MARR = 8.62%

3. Development of the Outcome for Alternative

 

In Table-1 Outflow for both investments is 60000 OMR, Present value, Future value, NPV, IRR & ERR are calculated below

Table-1 Outflow, Present value, Future value, NPV, IRR & ERR

Table-1 Outflow, Present value, Future value, NPV, IRR & ERR

4. Selection of Criteria

Investment will be accepted if ERR> MARR and IRR>0.

5. Analysis and Comparison of the Alternative

Table-2 Comparison between Investment A & Investment B

Table-2 Comparison between Investment A & Investment B

6. Selection of the Preferred Alternative

From table-2 it can be observed that both investments ERR˂MARR which give us a result that both investment doesn’t worth to invest in.

7. Performance Monitoring and the Post Evaluation of ResultFor the W9 blog investment B was selected to be the best investment. After calculation of ERR and compared it with MARR it was rejected because ERR˂MARR. This mean that before to  decide in an investment NPV, IRR, ERR &MARR to be compared first then decide to go ahead for the investment or not.

8. References:

  1. W9 _Said Alamri_ Investment Decision based on NPV, retrieved on 16 August 2014  https://pmioman14.wordpress.com/2014/08/10/w9-_said-alamri_-investment-decision-based-on-npv/
  2. and IRR in Excel 2010, retrieved on 16 August 2014 http://www.youtube.com/watch?v=qAhV3xG0i8s
  3. W5_AlShehhi_Calculating MARR Using Analytical Hierarchy Methodology, retrieved on 16 August 2014 https://pmioman14.wordpress.com/2014/07/09/w5_alshehhi_calculating-marr-using-analytical-hierarchy-methodology/#more-1172
  4. W12_Hassan Albarrami_ (IRR,ERR,MARR) (2), retrieved on 16 August 2014 https://pmioman14.wordpress.com/2014/08/11/w12_hassan-albarrami_-irrerrmarr-2/

 

Advertisements

One thought on “W10 _Said Alamri_ Investment Decision based on NPV (part two: IRR, ERR&MARR Comparison)

  1. EXCELLENT, Said!!! Nice case study and you really analyzed it using many different tools…… Can’t ask for anything more than that from you!!!

    What I would like to see before you are done are a couple of blogs on scheduling (from the GAO’s Best Practices in Scheduling) and the maybe 1 or 2 from the GAO Capital Budgeting “Best Practices”? Show us that you have mastered the use of the “best tested and proven” practices from those documents and you will be in great shape not only to pass your PMP but to add value to your organization through the application of these tools and techniques…..

    BR,
    Dr. PDG, Jakarta

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