In this chapter, we add to our repertoire of alternative comparison tools. In
the last chapter we learned the PW method. Here we learn the equivalent
annual worth, or AW, method. AW analysis is commonly considered the
more desirable of the two methods because the AW value is easy to calculate;
the measure of worth—AW in dollars per year—is understood by most
individuals; and its assumptions are essentially identical to those of the PW
method.
Annual worth is also known by other titles. Some are equivalent annual
worth (EAW), equivalent annual cost (EAC), annual equivalent (AE), and
EUAC (equivalent uniform annual cost). The resulting equivalent annual
worth amount is the same for all name variations. The alternative selected by
the AW method will always be the same as that selected by the PW method,
and all other alternative evaluation methods, provided they are performed
correctly.
In the case study, the estimates made when an AW analysis was performed
are found to be substantially different after the equipment is installed.
Spreadsheets, sensitivity analysis, and annual worth analysis work
together to evaluate the situation.
