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.
Read more about Equivalent Annual Cost: A Practical Example
Famous quotes containing the words equivalent, annual and/or cost:
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“It may cost me twenty thousand francs; but for twenty thousand francs, I will have the right to rail against the iniquity of humanity, and to devote to it my eternal hatred.”
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