• AW value is equivalent to the PW and FW values at
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the MARR for n years. AW = PW(A/P, i, n)=FW(A/F, i, n) • When all cash flow estimates are converted to an AW value, this value applies for every year of the life- cycle, and for each additional life cycle. • Advantage: The AW value has to be calculated for only one life cycle. Therefore, it is not necessary to use LCM of lives, as it is for PW or FW analysis. • Some Applications: • Asset replacement & retention (maintenance) time studies to minimize annual costs. • Break even studies and make or buy studies etc.
When alternatives being compared have different lives,
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the AW method makes the assumptions that: • The services provided are needed for the indefinite future (forever). • The selected alternative will be repeated for succeeding life cycles in exactly the same manner as for the first life cycle. • All cash flows will have the same estimated values in every life cycle.
• Consider a location A, which has a 6-year life cycle. The
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diagram shows cash flows for all three life cycles (first cost $15,000; annual cost $3500; deposit return $1000). Demonstrate the equivalence at interest rate=15% of PW over the three life cycles and AW over one cycle. If the 18 years LCM is considered, the PW calculated is $ -45,036.
An alternative should have the following cash flow estimates:
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– Initial investment P – Salvage value S – Annual amount A
The AW is comprised of two components: Capital recovery of
the initial investment P at a stated interest rate (usually the MARR) and the equivalent annual amount A. The symbol CR is used for the capital recovery component.
AW = - CR – A - ive sign here represents costs
CR is the equivalent annual cost of owning the asset plus
return on initial investment.
CR = - [ P ( A / P , i , n ) – S ( A / F , i , n ) ]
– 0.5(A/F, 12%, 8)} • CR = $ -2.47 million • It means that every year of 8 years, the equivalent total revenue from the tracker must be at $ -2.47 million just to recover the initial present worth investment plus the required return of 12%. This does not include AOC of $ 0.9 million. • AW = -2.47 – 0.9 = $ -3.37 million per year
• For mutually exclusive alternatives, calculate AW at the MARR. – One alternative: AW≥0, MARR is met or exceeded – Two or more alternatives: choose the lowest cost or highest income (numerically largest) AW value.
• AW = $ -5362 • This shows once again that alternative is clearly not financially viable at MARR = 10% • Note that estimated $ 1200 income per year has reduced the required annual amount from $ 5822 to $ 5362 • To do Computer analysis, use NPV and PMT functions………..see the solution in book. • NPV is used to determine P and PMT finds the equivalent A value.
• This section discusses the annual worth equivalent of
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the Capitalized Cost. • A=Pi • Effect same as Capitalized cost. • For the evaluation of public sector projects, such as flood control, irrigation canals, bridges, and other large scale projects. • Cash flows recurring at regular or irregular intervals are handled exactly as in conventional AW computations; they are converted to the equivalent uniform annual amounts A for one cycle.