Chapter 8. Bases for Comparison
The last chapter showed how cash-flow instances can be added, subtracted, or compared only when they are referenced to the same time frame. That same rule applies to adding, subtracting, or comparing different cash-flow streams. A basis for comparison is simply a common frame of reference for comparing two or more cash-flow streams in a consistent way. It's a way of using equivalence to enable you to compare proposals meaningfully. Six different bases are discussed in this chapter:
Present worth
Future worth
Annual equivalent
Internal rate of return
Payback period
Capitalized equivalent amount
These bases for comparison are at the core of the business decision-making process in the next chapter.
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