How the eac works eac is often used as a tool in capital budget decision making for evaluating investments of unequal lifespans. Investment decision rules 3 equivalent annual annuity. Traditional project profitability metrics such as npv, irr or payback period provide a very valuable perspective on how financially viable projects are overall. Equivalent annual cost eac definition investopedia. You must be wondering how to approach it because each light has different useful life. Step 1 calculate the net present value npv of cost for each potential replacement cycle. The equivalent annual cost eac method is a useful tool in asset pricing, lease financing and corporate investment. Data concerning the alternative under consideration are presented below. To account for these features, the equivalent annual cost eac of each pump should be calculated. The technique was first discussed in 1923 in engineering literature, and, as a consequence, eac appears to. Equivalent annual cost eac is the annual cost of owning, operating, and maintaining an asset over its entire life. The concept of equivalent annual cost is relevant in. The quality of the video could be improved if you change the resolution. Equivalent annual costs and benefits f9 financial management.
The fuzzy sets theory is combined here with the dynamic method used for economic. The equivalent annual cash flow eacf method has different versions in corporate finance and asset pricing, such as the equivalent annual cost, the equivalent annuity, the equivalent annual benefits, etc. Pdf life cycle equivalent annual cost lceac as a comparative. It is a capital budgeting tool used by companies to compare assets with unequal useful lives. Eea is a metric used to determine how financially efficient projects are. Equivalent annual cost eac is the cost per year for owning or maintaining an asset over its lifetime. Equivalent annual annuity eaa overview, formula, example. Discounted cash flow dcf is a valuation method used to estimate the. Equivalent annual cost eac is the annual cost of owning and maintaining an asset determined by dividing the net present value of the asset purchase, operations and maintenance cost by the present value of annuity factor. Identification of optimal disposal points using equivalent uniform annual cost pdf. Equivalent annual cost or eac is the cost per year of owning, operating, and maintaining an asset over its lifetime. It deals with projects with different economic lives and has wide applications in many fields outside the finance or even business. In finance, the equivalent annual cost eac is the cost per year of owning and operating an.
Calculating eac is useful in budgeting decisionmaking by converting the price of an asset to an equivalent annual. It deals with projects with different economic lives and has wide applications. The use of equivalent annual cost for costbenefit analyses in flood. The equivalent annual cost eac is the annual cost of owning, operating, and maintaining an asset over its entire life while the whole life cost is the total cost of the asset over its entire life. The same concept can be applied to analyse projects which have unequal useful lives. The eac represents the annual cost of owning and operating the pump over its entire lifetime. The equivalent annual cost eac is the annual cost of owning, operating and maintaining an asset over its entire life. Calculating eac is useful in budgeting decisionmaking by converting. To change this, click on the settings icon cog wheel and you can adjust it. Professor david hillier, university of strathclyde. Equivalent annual annuity or eaa is a method of evaluating projects with different life durations. The equivalent annual cost method involves the following steps.