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.
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