1. What is Annual Worth Analysis?

Annual Worth (AW) analysis is an economic evaluation method that converts all cash flows to an equivalent uniform annual amount. It is commonly used in engineering economics and capital budgeting to compare investment alternatives with different lifetimes.

2. How Does the Calculator Work?

The calculator uses the Annual Worth formula:

Where:

• \( AW \) — Annual Worth ($/year)
• \( PW \) — Present Worth ($)
• \( i \) — Interest rate (%)
• \( n \) — Number of years
• \( (A/P, i, n) \) — Capital Recovery Factor (unitless)

Explanation: The capital recovery factor converts a present amount into an equivalent uniform annual series over the project lifetime, considering the time value of money.

3. Importance of Annual Worth Calculation

Details: Annual Worth analysis is crucial for comparing investment alternatives with different service lives, as it provides a common basis for comparison. It helps decision-makers evaluate the annual cost or benefit of projects and investments.

4. Using the Calculator

Tips: Enter present worth in dollars, interest rate as a percentage, and number of years. All values must be positive numbers with years being at least 1.

5. Frequently Asked Questions (FAQ)

Q1: What is the capital recovery factor (A/P)?
A: The capital recovery factor converts a present amount into an equivalent uniform annual series, accounting for both principal repayment and interest over the project lifetime.

Q2: When should I use Annual Worth analysis?
A: Use AW when comparing alternatives with different service lives, when annual costs are important for budgeting, or when stakeholders prefer annual rather than present value comparisons.

Q3: How does interest rate affect Annual Worth?
A: Higher interest rates increase the annual worth because the capital recovery factor increases with higher interest rates, reflecting the higher cost of capital.

Q4: Can Annual Worth be negative?
A: Yes, a negative Annual Worth indicates that the project has a net annual cost rather than benefit, which may still be acceptable if it provides necessary services or enables other profitable activities.

Q5: What are the limitations of Annual Worth analysis?
A: AW assumes constant interest rates, may not capture irregular cash flows well, and requires careful consideration of project lifetimes when comparing alternatives.