Module 2 : Comparison of alternatives

Lecture 4 : Comparison of alternatives by future worth method

The equivalent future worth of Alternative-1 can also be determined in the following manner (Referring to cash flow diagram of Alternative-1, Fig. 2.1);

Now putting the values of different compound interest factors in the above expression;

FW1 = -Rs.480252

Now it can be seen that the calculated future worth of Alternative-1 by both ways is same. The minor difference between the values is due to the effect of decimal points in the calculations.

The equivalent future worth of Alternative-2 is calculated as follows;

PW2 is the equivalent present worth of Alternative-2 which is equal to - Rs.289215 (referring to Example-1).

Now putting the value of single payment compound amount factor in the above expression;

FW2 = -Rs.465781

The equivalent future worth of Alternative-2 can also be determined in the same manner as in case of Alternative-1 and is presented as follows (Referring to cash flow diagram of Alternative-2, Fig. 2.2);

Now putting the values of different compound interest factors in the above expression;

FW2 = -Rs.465779

Thus the future worth of Alternative-2 obtained by both methods is same. In this case also the minor difference between the values is due to the effect of the decimal points in the calculations.

Comparing the equivalent future worth of the both the alternatives, it is observed that Alternative-2 will be selected as it shows lower negative equivalent future worth as compared to Alternative-1. This outcome of the comparison of the alternatives by future worth method is same as that obtained from the present worth method (Example-1). This is due to the equivalency relationship between present worth and future worth through compound interest factors at the given rate of interest per interest period.