W4_Khalid Almamari_ selection of renting apartments


  1. Problem Definition.

Oman is encouraging a tourist business where around 2 million tourists visiting the Sultanate in 2013, hence building projects seems to be visible especially in Muscat as capital city where anyone can invest his money. Building of 20 flats is the investment idea which entails scientific study to find a location with minimum payback period.

  1. Identify the Feasible Alternative.

The following are the alternatives;

Three locations are attractive to the visitors in Muscat city

  • A’Seeb
  • Bousher
  • Mutrah

Payback period will be applied to select the best location out of these 3 locations.

 

  1. Development of the Outcome for Alternative

The fixed (land and construction) and variable cost (services) for each location have been considered with maximum limit. These factors will support o calculate the yearly profit as per the sent prices. It was assumed that the building will be occupied and rented the whole year to be same with all locations.

 

 

  1. Selection of the Acceptable Criteria.

Lowest value is the selection criteria.

w4

Table 4 is showing the payback period calculations that consider the number of years required to cover the cost and losses. Breakeven calculation: Breakeven point = (land cost + building cost)/ (estimated yearly profit -estimated yearly variable cost).

 

  1. Analysis and Comparison of the Alternative.

It is clear from previous table that land cost and building cost in A’Seeb is cheaper than other two locations but it takes 13.1 years to cover the losses which is more than others. Mutrah total cost is less than Bousher however it takes 4.2 more years to cover the losses.

 

  1. Selection of the Preferred Alternative.

It is very clear that Bousher is the preferred one as it takes 7.7 years to pay back the cost and losses.

 

  1. Performance Monitoring and the Post Evaluation of Result.

From the result, even though Bousher is preferred but still 7.7 years are relatively high (as comparing of good investment should be less than 7 years as Oman’s Market) which requires further cost cutting to be studied to reduce capital cost.

 

References:

  1. Finance formulas, Payback period. Retrieved on August 10th, 2014 from

http://www.financeformulas.net/Payback_Period.html 

2. Finding your way around, Normal Probability Distribution. Retrieved on August 10th, 2014 from

http://mathbits.com/MathBits/TISection/Statistics2/normaldistribution.htm

3. Jan, I, Payback Period, Retrieved on August 11th, 2014 from http://accountingexplained.com/managerial/capital-budgeting/payback-period

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One thought on “W4_Khalid Almamari_ selection of renting apartments

  1. Nice case study, Khalid and you did a good job on your analysis. Why not take this same case study and do an IRR and ERR analysis? Just be sure to validate the MARR you choose to use.

    BR,
    Dr. PDG, Muscat, Oman

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