Criteria

For each of the three possible categories of problems, there is an annual cost criterion for economic efficiency.

Application of Annual Cost Analysis

In the section on present worth, we pointed out that the present worth method requires a common analysis period for all alternatives. This restriction does not apply in all annual cost calculations, but it is important to understand the circumstances that justify comparing alternatives with different service lives.

Frequently, an analysis is to provide for a more-or-less continuing requirement. For example, one might need to pump water from a well on a continuing basis. Regardless of whether the pump has a useful service life of 6 years or 12 years, we would select the one whose annual cost is a minimum. And this still would be the case if the pump's useful lives were the more troublesome 7 and 11 years. Thus, if we can assume a continuing need for an item, an annual cost comparison among alternatives of differing service lives is valid. This is because the underlying assumption made in these situations is that the shorter-lived alternative can...