Equivalent annual worth analysis in Engineering Economics

Based on Riggs et al. (1998), I note the following topics in Equivalent annual worth analysis (EAWA) in Engineering Economics:

1. When to use EAWA
• The inclination to view a year's gains and lossess as a yardstick of progress.
• For complementary comparisons to improve analysis clarity.
2. On the capital recovery factor (which converts a lump sum to an equivalent annuity) and capital recovery calculations
3. Consideration of asset life
• Definitions of asset life
• Comparisons of assets with equal and unequal lives
• The case of perpetual life
4. Use of a sinking fund: i.e. the sinking fund factor is applied to compute the annuity required to accumulate a certain future amount
5. Equivalent uniform payments when interest rates vary
6. Annuity contract for a guaranteed income: e.g. for a retirement plan with a guaranteed income

Also note the related Excel function as illustrated in the following exhibits:

Exhibit 1: Use the =pmt function to calculate annuity in Excel; in this case interest rate is 10%; the number of payment is 5 and, finally, the present value is $100; the answer from the formula is -26.38

Exhibit 2: Information about the PMT formula in Excel  from the online help of Excel (extracted)

Exhibit 3: To verify that the figure of 26.38 is correct withe the compound interest rate tables of the subject of Engineering Economics

References

1. Riggs, J.L., Bedworth, D.D. and Randhawa, S.U. (1998) "Chapter 4: Equivalent annual-worth comparisons" Engineering Economics, McGraw-Hill.
2. On annuity (video): http://www.youtube.com/watch?v=awvy-UrqZjM&feature=related