EQUIVALENT ANNUAL COST EAC

The annual cost of owning an asset over its entire life. Equivalent annual cost is often used by firms for capital budgeting decisions. Eqivalent annual cost is calculated as:

The equivalent annual cost equation allows a company to compare the cost effectiveness of various assets. It is best used in instances where investment projects do not have the same lifespan. Since the numerator in the equation is equivalent to Net Present Value, the equation allows managers to compare NPVs of differing projects over different periods, to accurately determine the best option.