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PW, AW and FW decision for equipment

Short answer

Net annual cash flow = Rs 90,000. PW = Rs 40,717, AW = Rs 7,206 per year, FW = Rs 126,462. All positive, so the equipment should be purchased.

An equipment costing Rs. 5,00,000 is estimated to have life of 10 years and expected annual revenue is Rs. 1,10,000 with annual cost of Rs. 20,000. Determine the investment decision from PW, AW and FW method to this equipment when salvage value is Rs. 1,00,000 and MARR is 12%.

Net annual revenue = 1,10,000 − 20,000 = Rs 90,000. I = 5,00,000; S = 1,00,000; N = 10 years; MARR = 12%. Assumed that revenue and cost occur at the end of each year.

 yr 0: -5,00,000      yr 1..10: +90,000      yr 10: +1,00,000

Factors at 12%, 10 years: (P/A) = 5.6502, (P/F) = 0.3220, (A/P) = 0.17698, (F/P) = 3.1058

PW method

PW = −5,00,000 + 90,000 (P/A, 12%, 10) + 1,00,000 (P/F, 12%, 10) = −5,00,000 + 508,520 + 32,197 = Rs +40,717

AW method

AW = PW (A/P, 12%, 10) = 40,717 × 0.17698 = Rs +7,206 per year

Check: AW = −(5,00,000 − 1,00,000)(A/P) − 1,00,000 × 0.12 + 90,000 = −70,794 − 12,000 + 90,000 = 7,206

FW method

FW = PW (F/P, 12%, 10) = 40,717 × 3.1058 = Rs +126,462

MethodValueDecision
PW+40,717> 0, accept
AW+7,206> 0, accept
FW+126,462> 0, accept

Answer: PW, AW and FW are all positive, so the equipment should be purchased. (All three methods always give the same decision.)

✓ Answer checked by Claude Opus 5.5 (high effort)

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