Sunday, November 18, 2012

W9_FELIX_ EVALUATING APARTMENT INVESTMENT USING IRR



1.      Problem Recognition, Definition and Evaluation
A new Apartment was built in central city of Jakarta, JalanSudirman. The developer was offering a good price for the opening. For One Bed room the price is Rp. 280.000.000, and predict resale value will up 5.7% per year. Developer offering mortgage with 10.75% annual interest rate. The apartment require 1.5 years to construct and have rightful life 20 years.
If I want to consider to invest at the apartment with my minimum interest rate 5%, how much the IRR and NPV??

2.      Feasible alternatives
Using IRR and NPV analysis I want to configure should I buy the apartment or just saving on a bank and wait until a proper time.
The analysis will be based for below alternative.
a.       Buy the apartment by 10.75% annual interest for 5 years mortgage
b.      Monthly deposit bank with having interest 5%/ year.
c.       Buy Apartment and rent in for additional income

3.      The cash flow for each feasible alternatives
 a.       Buy the apartment
 
 
 
 b.       Monthly deposit bank with having interest 5%/ year.
 
 c.       Buy Apartment and rent in for additional income.
The market of renting value at central district will worth 5% from the price value depend on the interior design. To have a good interior will required cost Rp.40.000.000.
 


4.      Selection of the acceptable criteria.
Using the NPV and IRR, we will analyze which one from both of the Investmentwill give the best profit.

5.      Analysis for the alternatives


a.       Buy the apartment.
 
b.      Monthly deposit bank with having interest 5%/ year.
 
c.       Buy Apartment and rent in for additional income.
 


6.      Select the preferred alternative
From above analysis we can take conclusion NPV and IRR for investing at apartment with additional renting income will have a good profit with NP >0; and IRR > MARR (5%). Below graphic describe that buy + rent will have better profit than others.
7.      Performance Monitoring & Post Evaluation of Result
Performance and the quality of these calculation will be challenge.

8.      Reference:
·      William G.Sullivan, ElinM.Wicks, and C.PatrickKoelling.Engineering Economics-Fifteen Edition, chapter 11, Breakeven analysis(London, 2012).
·      Understanding The Time Value Of Money,www.investopedia.com
·      Time value of money,http://en.wikipedia.org/wiki/Time_value_of_money


2 comments:

  1. AWESOME case study, Pak Felix. I loved it!!

    But how about taking this one step further? How about looking at investing your 20% down payment in gold coins instead of property?

    And how about looking not only at NPV and IRR, but also ERR and Payback Period?

    You can easily get AHEAD on your blog postings by taking this same case study, which is really good and use it as the basis for demonstrating how many other tools from Engineering Economy you can apply?

    As noted earlier, remember that if you use at least 2 different tools and techniques from any chapter in Engineering Economy, you can claim earned value credit not only for your blog posting, but also for solving the problems.

    Explained another way, for the same amount of work, you can claim credit for TWO deliverables at the same time.... THAT is working SMART, not HARD.

    Keep up the good work and get caught up. I also want to see more work on your paper as well.

    Both Hari's and Ridwan's papers got published in the PM World Journal http://pmworldjournal.net/?article=earned-value-management-adapted-for-use-in-underground-mining-operations and http://pmworldjournal.net/?article=exploring-gold-as-alternative-currency-for-future-cost-estimation-in-telecommunication-projects

    I expect to see at least ONE and ideally TWO or THREE papers coming from this class. Your's should be one of them....

    BR,
    Dr. PDG, Jakarta

    ReplyDelete
  2. PS: Better watch your citations.

    In the last month or so, the OWL made some changes. http://owl.english.purdue.edu/owl/resource/560/10/

    This is what your online references should now look like:

    Author, A. A., & Author, B. B. (Date of publication). Title of article. In Title of book or larger document (chapter or section number). Retrieved from http://www.someaddress.com/full/url/


    Engelshcall, R. S. (1997). Module mod_rewrite: URL Rewriting Engine. In Apache HTTP Server Version 1.3 Documentation (Apache modules). Retrieved from http://httpd.apache.org/docs/1.3/mod/mod_rewrite.html

    If yours don't look like this, you need to start changing them to conform to the revised APA standard.

    BR,
    Dr. PDG, Jakarta

    ReplyDelete