Comparison of alternatives by present worth method:
In the present worth method for comparison of mutually exclusive alternatives, the future amounts i.e. expenditures and incomes occurring at future periods of time are converted into equivalent present worth values at a certain rate of interest per interest period and are added to present worth occurring at ‘0’ time. The converted equivalent present worth values are always less than the respective future amounts since the rate of interest is normally greater than zero. The cash flow of the mutually exclusive alternatives may consist of future expenditures and incomes in different forms namely randomly placed single amounts, uniform amount series commencing from end of year 1, randomly placed uniform amount series i.e. commencing at time period other than end of year 1, positive and negative uniform gradient series starting either from end of year 1 or at different time periods and geometric gradient series etc. The different compound interest factors namely single payment present worth factor, uniform series present worth factor and present worth factors for arithmetic and geometric gradient series etc. will be used to convert the respective future amounts to the equivalent present worth values for different alternatives.   

The methodology for the comparison of mutually exclusive alternatives by the present worth method depends upon the magnitude of useful lives of the alternatives. There are two cases; a) the useful lives of alternatives are equal and b) the useful lives of alternatives are not equal. The alternatives having equal useful lives are designated as equal life span alternatives whereas the alternatives having unequal life spans are referred as different life span alternatives.

a) Equal life span alternatives
The comparison of mutually exclusive alternatives having equal life spans by present worth method is comparatively simpler than those having different life spans. In case of equal life span mutually exclusive alternatives, the future amounts as already stated are converted into the equivalent present worth values and are added to the present worth occurring at time zero. Then the alternative that exhibits maximum positive equivalent present worth or minimum negative equivalent present worth is selected from the considered feasible alternatives.

a) Different life span alternatives
In case of mutually exclusive alternatives, those have different life spans, the comparison is generally made over the same number of years i.e. a common study period. This is because; the comparison of the mutually exclusive alternatives over same period of time is required for unbiased economic evaluation of the alternatives. If the comparison of the alternatives is not made over the same life span, then the cost alternative having shorter life span will result in lower equivalent present worth i.e. lower cost than the cost alternative having longer life span. Because in this case, the cost of the short span alternative is considered only for a shorter period of time, even though this alternative may not be economical. In case of mutually exclusive investment alternatives, the alternative with longer life span will result in higher equivalent present worth i.e. higher positive equivalent worth, as the costs, revenues, savings through reduced costs is considered over a longer period of time than the alternative with shorter life span. Thus in order to minimize the effect of such kind of discrepancy on the selection of best alternative from the considered feasible alternatives, the comparison is made over the same life span.