Calculating Equivalent Annual Cost

EAC Formula:

\[ EAC = \frac{NPV \text{ of Costs}}{Annuity \ Factor} \]

Equivalent Annual Cost (EAC):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Equivalent Annual Cost?

Equivalent Annual Cost (EAC) is the annual cost of owning, operating, and maintaining an asset over its entire life. It converts the net present value of costs into an equivalent annual amount, making it easier to compare projects with different lifespans.

2. How Does the Calculator Work?

The calculator uses the EAC formula:

\[ EAC = \frac{NPV \text{ of Costs}}{Annuity \ Factor} \]

\[ Annuity \ Factor = \frac{1 - (1 + r)^{-n}}{r} \]

Where:

\( EAC \) — Equivalent Annual Cost (currency/year)
\( NPV \) — Net Present Value of Costs (currency)
\( r \) — Discount Rate (decimal)
\( n \) — Number of Periods (years)

Explanation: The annuity factor converts a present value into an equivalent annual payment over the specified period at the given discount rate.

3. Importance of EAC Calculation

Details: EAC is crucial for capital budgeting decisions, allowing comparison of projects with different lifespans and helping organizations make informed investment choices based on annual cost efficiency.

4. Using the Calculator

Tips: Enter NPV of costs in currency units, discount rate as a decimal (e.g., 0.08 for 8%), and number of periods in years. All values must be positive and valid.

5. Frequently Asked Questions (FAQ)

Q1: When should I use EAC analysis?
A: Use EAC when comparing projects with different lifespans, evaluating equipment replacement decisions, or assessing long-term capital investments.

Q2: How does discount rate affect EAC?
A: Higher discount rates result in lower EAC values, as future costs are discounted more heavily. The discount rate reflects the time value of money and risk.

Q3: What's the difference between EAC and annual cost?
A: EAC accounts for the time value of money by converting all costs to an equivalent annual amount, while simple annual cost doesn't consider the timing of cash flows.

Q4: Can EAC be used for revenue projects?
A: While typically used for cost analysis, EAC can be adapted for revenue projects by calculating equivalent annual net benefits (EANB).

Q5: What are the limitations of EAC?
A: EAC assumes constant annual costs, may not capture all project complexities, and relies on accurate estimates of discount rates and project lifespans.