W7_Folakemi_Investment Project Viability

1.      Problem recognition, definition and evaluation

An entrepreneur is considering investing in different projects for the purpose of generating additional streams of income in 2013. He has identified four different projects that can be set up in 2013 to achieve his objective of additional income. The objective of this write up is to determine whether each of the four projects being considered by the entrepreneur is individually economically viable.

2.      Development of the feasible alternatives

The four projects being considered by the entrepreneur are:

(i)                 Set up a Training School

(ii)               Set up a Recruitment Agency

(iii)             Set up a Clothing Store

(iv)             Set up a catfish farm

3.      Development of the outcomes for each alternative

A review of literature revealed that some of the methods that can be used to evaluate the economic viability of a project are:

•   The Present Worth of the project, which should be greater than zero (PW>0)
•  The Internal Rate of Return (IRR) of the project, which should be greater than the MARR, i.e. the Minimum Attractive Rate of Return

4.      Selection of criteria

The projects will be evaluated using two techniques i.e. Present Worth (PW) and Internal Rate of Return (IRR) methods. In the PW method, all cash inflows and outflows expected from the project are discounted to their present values using an appropriate interest rate called the MARR, i.e. the Minimum Attractive Rate of Return. The assumed MARR for this entrepreneur is 20%.

The IRR method solves for the interest rate that equates the equivalent worth of an alternative’s cash inflows to the equivalent worth of the cash outflows⁽³⁾. The resultant interest rate is called the Internal Rate of Return (IRR).

Table 1 - Analysis of Alternatives (Dollars)

5.      Analysis and comparison of the alternatives

Table 2. Present Worth (PW) of Projects

 

Although the Clothing Store is projected to have the highest market value at the end of 5 years, it has a negative PW. It is therefore not economically viable. Based on the computations of present worth the Training School, Recruitment Agency and Fish Farm are all economically viable.

Table 3. Internal Rate of Return (IRR) of Projects

 

Using the IRR method, the Clothing Store has a IRR of 33% which is higher than the minimum appropriate rate of return of 20%, as shown in Table 3 above. It is therefore economically viable based on this method.

6.      Selection of the preferred alternative

Based on the two different methods used in evaluating the projects, the following table shows the list of projects in order of economic viability from the most viable to the least.

Table 4. Projects by Economic Viability

7.      Performance Monitoring & Post Evaluation of Result

It will be useful to also evaluate the projects based on other qualitative factors such as initial investment required versus availability of funds, skills required, etc.

8.      References

1. Manshu (2010, November 23). What is IRR and how is it calculated? One Mint. Retrieved from: http://www.onemint.com/2010/11/23/what-is-irr-and-how-is-it-calculated/ 
2.  Obukoeroro J. (2011). Project Economics as a Tool for Evaluation of Viability of Projects: A Case of Palm Oil Milling Plant. Journal of Innovative Research in Engineering and Sciences (2,6), pp. 307-318
3. Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15th ed.) (pp 200-221) New Jersey, NJ. Pearson Higher Education, Inc.