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PW, FW, Aw: Shreyam Pokharel

The document discusses time value of money concepts like present worth (PW), future worth (FW), and annual worth (AW) and how they can be used to evaluate investment projects. It provides formulas to calculate PW, FW, and AW at a given interest rate. As an example, it analyzes a $25,000 equipment investment that would generate $8,000 annual cash flows over 5 years and have a $5,000 salvage value. Using the PW, FW, and AW formulas at a 20% interest rate, all three methods show a positive value, indicating the project is economically justified.

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515 views14 pages

PW, FW, Aw: Shreyam Pokharel

The document discusses time value of money concepts like present worth (PW), future worth (FW), and annual worth (AW) and how they can be used to evaluate investment projects. It provides formulas to calculate PW, FW, and AW at a given interest rate. As an example, it analyzes a $25,000 equipment investment that would generate $8,000 annual cash flows over 5 years and have a $5,000 salvage value. Using the PW, FW, and AW formulas at a 20% interest rate, all three methods show a positive value, indicating the project is economically justified.

Uploaded by

Luna Insorita
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PW, FW, AW

Shreyam Pokharel (40)


Time Value of Money
● The amount of money cannot guarantee its worth across different time
periods.
● The amount of Rs. 100 in 2021 remains the same in the next 10 years but
it’s worth probably decreases with each time period.
● The worth of that money can be affected by various economic factors.
● We can calculate the present, future and annual values of the money.
Equivalence worth
● Useful in evaluating a single project
● Consider the feasibility of the project by converting all the cash flow into
equivalent single value
● Choose any of PW, FW, AW for this purpose
PW (Present Worth)
The PW is based on the concept of equivalent worth of all cash flows relative
to some base or beginning point in time called the present assuming interest
rate equal to the MARR.

If PW (i=MARR) ≥ 0, the project is economically justified.


At i=MARR,

where,
Fk = Cash Flows at the end of kth time period
FW (Future Worth)
The FW is based on the equivalent worth of all cash inflows and outflows at
the end of the planning horizon (study period) at an interest rate that is
generally the MARR.

If FW (i=MARR) ≥ 0, the project is economically justified.


At i=MARR,

where,
Fk = Cash Flows at the end of kth time period
AW (Annual Worth)
The AW of a project is an equal annual series of amounts, for a stated study
period, that is equivalent to the cash inflows and outflows at an interest rate
that is generally the MARR.

If AW (i=MARR) ≥ 0, the project is economically justified.


At i=MARR,

where,
R = Annual Equivalent Revenue
E = Annual Equivalent Expenses
CR = Annual Equivalent Capital Recovery Amount

where,
I = initial investment for the project
S = salvage (market) value at the end of the study period
Numerical Example

A piece of new equipment has been proposed by engineers to increase the


productivity of a certain manual welding operation. The investment cost is
$25,000, and the equipment will have a market value of $5,000 at the end
of a study period of five years. Increased productivity attributable to the
equipment will amount to $8,000 per year after extra operating costs have
been subtracted from the revenue generated by the additional production.
If the firm’s MARR is 20% per year, is this proposal a sound one? Use the
PW, FW and AW method.
Present Worth

PW = PW of cash inflows − PW of cash outflows


PW(20%) = $8,000(P/A, 20%, 5) + $5,000(P/F, 20%, 5) − $25,000
= $8,000*2.99061214 + $5,000*0.401877572 − $25,000 = $934.29
Because PW(20%) ≥ 0, this equipment is economically justified.
Future Worth

FW = FW of cash inflows − FW of cash outflows


FW(20%) = $5,000 + $8,000(F/A, 20%, 5) − $25,000(F/P, 20%, 5)
= $5,000 + $8,000*7.4416 − $25,000*2.48832 = $2324.8
Because FW(20%) ≥ 0, this equipment is economically justified.
Annual Worth

AW = AW of cash inflows − AW of cash outflows

AW(20%) = $5,000(A/F, 20%, 5) + $8,000 − $25,000(A/P, 20%, 5)

= $5,000*0.1343797033 + $8,000 − $25,000*0.3343797033 = $312.40

Because AW(20%) ≥ 0, this equipment is economically justified.

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