In finance the equivalent annual cost (EAC) is the cost per year of owning and operating an asset over its entire lifespan.
EAC is often used as a decision making tool in capital budgeting when comparing investment projects of unequal lifespans. For example if project A has an expected lifetime of 7 years, and project B has an expected lifetime of 11 years it would be improper to simply compare the net present values (NPVs) of the two projects, unless neither project could be repeated.
EAC is calculated by dividing the NPV of a project by the present value of an annuity factor. Equivalently, the NPV of the project may be multiplied by the loan repayment factor.
The use of the EAC method implies that the project will be replaced by an identical project.
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Famous quotes containing the words equivalent, annual and/or cost:
“For some men the power to destroy life becomes the equivalent to the female power to create life.”
—Myriam Miedzian, U.S. author. Boys Will Be Boys, ch. 4 (1991)
“In soliciting donations from his flock, a preacher may promise eternal life in a celestial city whose streets are paved with gold, and that’s none of the law’s business. But if he promises an annual free stay in a luxury hotel on Earth, he’d better have the rooms available.”
—Unknown. Charlotte Observer (October 6, 1989)
“I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical terms.”
—Calvin Coolidge (1872–1933)