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. 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 . 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
4. Selection of Criteria
Investment will be accepted if ERR> MARR and IRR>0.
5. Analysis and Comparison of the Alternative
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.
- 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/
- and IRR in Excel 2010, retrieved on 16 August 2014 http://www.youtube.com/watch?v=qAhV3xG0i8s
- 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
- W12_Hassan Albarrami_ (IRR,ERR,MARR) (2), retrieved on 16 August 2014 https://pmioman14.wordpress.com/2014/08/11/w12_hassan-albarrami_-irrerrmarr-2/