Present Worth Analysis Chapter 5: Newnan, Eschenbach, and Lavelle Dr. Hurley’s AGB 555 Course

Present Worth Technique One way of comparing alternatives is to examine their present value/worth for the future streams of benefits and costs When dealing with examining multiple alternatives, we may run into one of three scenarios regarding the analysis period: The useful life equals the analysis period for each alternative being examined The useful lives differ from the analysis period for each alternative The analysis period has an infinite amount of periods

Net Present Worth Criterion We can calculate the net present work of an alternative by summing the present values of the benefits and subtracting the sum of the present values of the cost The formulas we have discussed up to this point can be used to conduct a net present worth analysis Note that present worth, present value, net present value, and net present worth are being viewed as the same thing

Useful Life Not Equal to Analysis Period In present worth analysis, we must have a specified analysis period This can be problematic when the alternatives’ useful lives do not coincide with the analysis period When the alternatives have different useful lives, a straight present worth analysis may not provide an accurate picture of which alternative is better You may want to find the least common multiple of the alternatives being examined and use that as your analysis period

Capitalized Cost and Infinite Analysis Period Capitalized cost is the present value of money that would need to be set aside to provide an annuity that lasts infinitely long In this case, the principal cannot decline over time This implies that the value of the annuity (A) must equal i*P which implies that P = A/i