1. What is Annual Worth?

Annual Worth (AW) is an economic analysis method that converts all cash flows into an equivalent uniform annual amount. It helps compare alternatives with different lifespans by expressing their costs and benefits as equivalent annual amounts.

2. How Does the Calculator Work?

The calculator uses the Annual Worth formula:

Where:

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

Explanation: The capital recovery factor converts a present amount into an equivalent uniform annual series over a specified period at a given interest rate.

3. Importance of Annual Worth Calculation

Details: Annual Worth analysis is crucial for comparing investment alternatives, equipment replacement decisions, and capital budgeting. It provides a consistent basis for evaluating projects with different durations and cash flow patterns.

4. Using the Calculator

Tips: Enter present value in dollars, interest rate as a percentage, and number of years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between Annual Worth and Net Present Value?
A: NPV gives the total present value of cash flows, while AW converts this to an equivalent annual amount, making it easier to compare alternatives with different lifespans.

Q2: When should I use Annual Worth analysis?
A: Use AW when comparing projects with different service lives, for equipment replacement decisions, or when annual budgeting is important.

Q3: What does a positive Annual Worth indicate?
A: A positive AW indicates that the project generates more benefits than costs on an annual basis and is economically justified.

Q4: How does interest rate affect Annual Worth?
A: Higher interest rates generally decrease the Annual Worth as the cost of capital increases, making future cash flows less valuable.

Q5: Can Annual Worth be used for perpetual projects?
A: For perpetual projects (infinite life), use Capitalized Cost analysis instead, as AW assumes a finite project life.