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's used to compare the cost-effectiveness of projects with different lifespans by converting their net present value into an equivalent annual amount.

2. How Does The Calculator Work?

The calculator uses the EAC formula:

Where:

• \( NPV \) — Net Present Value in USD
• \( r \) — Discount rate (as decimal)
• \( n \) — Project lifetime in years

Explanation: This formula converts a lump-sum present value into an equivalent annual cost stream, allowing for fair comparison between projects of different durations.

3. Importance Of EAC Calculation

Details: EAC is crucial for capital budgeting decisions, helping organizations choose between projects with different investment horizons and ensuring apples-to-apples comparisons of long-term costs.

4. Using The Calculator

Tips: Enter NPV in USD, discount rate as decimal (e.g., 0.08 for 8%), and project lifetime in years. All values must be positive and discount rate should be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: When should I use EAC instead of NPV?
A: Use EAC when comparing projects with different lifespans. For projects with same duration, NPV alone is sufficient.

Q2: What discount rate should I use?
A: Typically use the company's weighted average cost of capital (WACC) or an appropriate hurdle rate that reflects the project's risk.

Q3: Can EAC be negative?
A: Yes, if the NPV is negative (project has net costs), EAC will also be negative, indicating annual net cost.

Q4: How does EAC differ from annualized NPV?
A: EAC specifically converts costs to annual equivalents, while annualized NPV can apply to both costs and benefits.

Q5: What are the limitations of EAC?
A: Assumes constant annual costs, doesn't account for inflation variations, and requires accurate estimation of project lifespan and discount rate.