A future amount of money converted to its equivalent value now has a present
worth (PW) that is always less than that of the actual cash flow, because
for any interest rate greater than zero, all P/F factors have a value less than
1.0. For this reason, present worth values are often referred to as discounted
cash flows (DCF). Similarly, the interest rate is referred to as the discount
rate. Besides PW, two other terms frequently used are present value (PV) and
net present value (NPV). Up to this point, present worth computations have
been made for one project or alternative. In this chapter, techniques for
comparing two or more mutually exclusive alternatives by the present worth
method are treated.
Several extensions to PW analysis are covered here—future worth, capitalized
cost, payback period, life-cycle costing, and bond analysis—these all
use present worth relations to analyze alternatives.
In order to understand how to organize an economic analysis, this chapter
begins with a description of independent and mutually exclusive projects,
as well as revenue and service alternatives.
The case study examines the payback period and sensitivity for a public
sector project.
