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Equivalent annual cost

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.

The use of the EAC method implies that the project will be replaced by an identical project.

A practical example:
A manager must decide on which machine to purchase:

see also ROI - Return on Investment - Rate of return Quantity theory of money WACC - Weighted average cost of capital Rating Calculation Ordinary Annuity newest formulas Acceleration Calculating a weighted average Pregnancy Date Calculator Fill the yellow fields to see the result in the green fields!   A B C D 1   Machine A  Machine B    2 Investment cost      dollars  3 Expected lifetime      years  4 Annual maintenance      dollars  5         6 The cost of capital is    %    7         8 EAC      dollars  9         10 The conclusion is to invest in the machine which has the lower EAC  © formularium.org was this helpful ? Charts: try different interest rates : X=B6 / Y=B8,C8 / X from: to: see also: http://en.wikipedia.org/wiki/Equivalent_annual_cost link: http://formularium.org?go=82 (use this link to publish this page) Export:  Excel-Export Script: <script src="http://formularium.org/js.php?go=82"></script> (use this script to include this spreadsheet onto your own webpageExport)   (source: Equivalent annual cost. (2006, October 1). In Wikipedia, The Free Encyclopedia. Retrieved 18:49, November 28, 2006, from http://en.wikipedia.org/w/index.php?title=Equivalent_annual_cost&oldid=78862331) did you know that you can integrate any formula into your own homepage? try it! insert this code into your page: <script src="http://formularium.org/js.php?go=82"></script>