How do I add Applications to Favorites in Finder' Sidebar?

Finder menu > Preferences > Sidebar tab

Check the box next to Applications.

It is possible to simply Drag and Drop the Applications folder (or any other folder for that matter) under the Favorites sections of the Finder Sidebar. Just locate the desired folder in the Finder window, and drag and drop it under the Favorites section of the Sidebar.

Once added, it is also possible to reposition any item, again simply using drag and drop.

If the Sidebar is not visible in the Finder window for some reason, you can make it appear again by going to Menu bar → View → Show Sidebar or using the keyboard shortcut Option + Command + S.

The keyboard shortcut acts as a toggle and can be used to quickly hide and show the Finder Sidebar.