Video Transcript Pumps Annual Worth

Now with the annual worth criteria is going to do for you is going to save you a lot of computation. You effectively don’t need this stuff. So I want you guys just to remember that pump “A” is going to be our best choice. I’ll put a little star right there.

And what we’re going to do is get rid of all this stuff here. And were going to convert these present worth’s in to annual worth’s, and we can compare those directly. So remember the criteria we get to use for annual worth exclusive choice. Is choose the asset with highest annual worth. Provided the investments have equal allotments, and what we’re doing when we handle these repeated purchases in order to provide a certain fixed amount of service, is we’re saying these things actually do have equal lives; because yes as were evaluating on those repeated purchases. Not just the individual items even though we make the calculations with just the initial items.

So let’s get to the present worth of assets “A” and present worth of asset “B” so, I’m sorry annual worth. The annual worth of asset “A” is just equal to present worth of asset “A”. And then what you do is you find out the constant values there. So what you are going to do is look for “A” given that you know “P”. “P” that you know is the present worth. The “A” that you’re looking for is the annual worth. We’re going to keep the same interest rate we had before then the “N” is going to be the life of the asset. In this case it’s going to be three years. Now that calculation should give you the annual worth of the asset. You can think of this as like the average pumping cost. What this works out to be is $23.40.

We can also do that to find the annual worth of asset “B” and what we do is take this figure that we have right calculated right there the negative 147.91, and what we do is look for that annual cost/annual worth given that we know the present cost. Here’s the interest rate that we had before again; and the “N” is going again be the life of the asset. Which is 5 years, and this guy shows up as costing us $37.05 per year.

So clearly again this guy gives me-gives you better value when you’re looking at an annual worth criteria. That’s one of the nice things about the criteria. Is they always give you consistent answers; and that is the way of handling this with the annual choice criteria Much easier than present worth.

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