Equivalent Annual Annuity Calculator

EAA Formula:

\[ EAA = \frac{NPV}{\text{Annuity Factor}} \]

Equivalent Annual Annuity (EAA):

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1. What is Equivalent Annual Annuity?

Equivalent Annual Annuity (EAA) is a financial metric used to compare projects with different lifespans by converting their net present values into equivalent annual cash flows. It helps in capital budgeting decisions when comparing mutually exclusive projects with unequal lives.

2. How Does the Calculator Work?

The calculator uses the EAA formula:

\[ EAA = \frac{NPV}{\text{Annuity Factor}} \]

Where:

$ EAA $ — Equivalent Annual Annuity (currency/year)
$ NPV $ — Net Present Value (currency)
$ \text{Annuity Factor} $ — Present value annuity factor from tables

Explanation: The annuity factor is derived from the discount rate and project lifespan, representing the present value of $1 per period for the project's duration.

3. Importance of EAA Calculation

Details: EAA is crucial for comparing investment projects with different durations, ensuring fair comparison by standardizing cash flows to an annual basis. It helps in selecting the most economically viable project when lifespans vary.

4. Using the Calculator

Tips: Enter the project's net present value and the appropriate annuity factor from financial tables. Both values must be positive numbers for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: When should I use EAA analysis?
A: Use EAA when comparing mutually exclusive projects with different lifespans to make the comparison meaningful and standardized.

Q2: How do I find the annuity factor?
A: Annuity factors are available in financial tables or can be calculated using the formula: $ \frac{1 - (1 + r)^{-n}}{r} $ where r is discount rate and n is number of periods.

Q3: What are the limitations of EAA?
A: EAA assumes projects can be replicated indefinitely, which may not be realistic. It also relies on accurate NPV and discount rate estimates.

Q4: Can EAA be negative?
A: Yes, if the NPV is negative, the EAA will also be negative, indicating the project destroys value on an annual basis.

Q5: How does EAA differ from NPV?
A: NPV gives the total value of a project, while EAA converts this to an equivalent annual amount, making projects with different durations comparable.