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 is used in capital budgeting to compare the cost-effectiveness of various assets with different lifespans.

2. How Does The Calculator Work?

The calculator uses the EAC formula:

Where:

• \( NPV \) — Net Present Value (USD)
• \( r \) — Discount rate (decimal)
• \( n \) — Number of years

Explanation: This formula converts the net present value of costs into an equivalent annual amount, allowing for comparison between projects with different durations.

3. Importance Of EAC Calculation

Details: EAC is crucial for capital budgeting decisions, helping organizations choose between assets with different lifespans and cost structures by standardizing costs to an annual basis.

4. Using The Calculator

Tips: Enter NPV in USD, discount rate as a decimal (e.g., 0.08 for 8%), and number of 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 or assets with different lifespans to determine which option has the lowest annual cost.

Q2: How Does EAC Differ From Annual Cost?
A: EAC accounts for the time value of money and converts total lifecycle costs into equivalent annual amounts, while simple annual cost doesn't consider discounting.

Q3: What Discount Rate Should I Use?
A: Typically use the company's cost of capital or a risk-adjusted rate that reflects the project's risk profile.

Q4: Can EAC Be Used For Revenue-Generating Projects?
A: While EAC is primarily for cost comparison, it can be adapted by considering net costs (costs minus revenues).

Q5: What Are The Limitations Of EAC?
A: EAC assumes constant annual costs and may not capture variable operating costs or technological changes over time.