Appendix A 227ence of the decision maker.
The concept of annual worth as a measure of investment worth can
be generalized as follows:
Measure of Worth: Annual Worth
Description: All cash flows are converted to an equivalent uniform annual
series of cash flows over the planning horizon, using i = MARR.
Calculation Approach: AW = PW (A|P,i,n)
Decision Rule: If AW ≥0, then the investment is attractive.
Example 14
Reconsider the thermal window data of Example 13. If the annual
worth measure of worth is to be used, is this an attractive investment?
AW = PW (A|P,15%,6)
AW = 1529.70 (0.2642) = $404.15/yr
Decision: AW ≥0 ($404.15>0.0); therefore, the window investment is at-
tractive.
A.7.4 Internal Rate of Return
One of the problems associated with using the present worth or the
annual worth measures of worth is that they depend upon knowing a
value for MARR. As mentioned in the introduction to this section, the
“proper” value for MARR is a much debated topic and tends to vary from
company to company and decision-maker to decision-maker. If the value
of MARR changes, the value of PW or AW must be recalculated to deter-
mine whether the attractiveness/unattractiveness of an investment has
changed.
The internal rate of return (IRR) approach is designed to calculate a
rate of return that is “internal” to the project. That is,
if IRR > MARR, the project is attractive;
if IRR < MARR, the project is unattractive; and
if IRR = MARR, the project is indifferent.Thus, if MARR changes, no new calculations are required. We sim-
ply compare the calculated IRR for the project to the new value of MARR,
and we have our decision.