Measurements of Economic Worth
There are several methods of economic worth used to compare alternatives. If you decide to use present worth analysis, then you have indicate a preference to use a single sum of money at a time called "the present" as the basis for comparison. If you decide a future worth analysis, then you prefer to use a single sum equivalent at a time called "the future" as the basis for comparison. If instead of expressing an investment's economic worth as a single sum equivalent, you prefer to think in terms of an annualized figure, then the annual worth would be preferred. Some prefer to express the net economic worth as a rate or percentage, which is known as the internal rate of return (IRR). Finally, some prefer to have the net economic worth expressed as a percentage of the investment required - the benefit cost ratio.
The nine DCF methods may be described as follows:
1. The present worth (PW) method converts all cash flow to a single sum equivalent at time zero using i = MARR (minimum attractive rate of return)
2. The future worth (FW) method converts all cash flow to a single sum equivalent at the end of the planning horizon using i = MARR.
3. The annual worth (AW) method converts all cash flow to an equivalent uniform annual series of cash flows over the planning horizon using i = MARR.
4. The internal rate of return (IRR) method determines the interest rate that yields a future worth (or present worth or annual worth) of zero.
5. The external rate of return (ERR) method determines the interest rate that equates the future worth of the invested capital to the future worth of recovery capital (when the later is computed using the MARR).
6. The modified internal rate of return (MIRR) method determines the interest rate that equates the PW of invested capital (where the present worth is calculated using a finance rate) to the future worth of recovered capital (where the future worth is calculated using the MARR).
7. The discounted payback period (DPBP) method determines how long it takes for the cumulative present worth to be positive using i =MARR.
8. The capitalized worth (CW) determines the present worth (using i = MARR) when the planning horizon is infinitely long.
9. The benefit/cost ratio (B/C) method determines the ratio of the present worth of benefits (saving or positive-valued cash flows) to the negative of the present worth of the investment(s) or negative-valued cash flows using i = MARR.