What is the 'Equivalent Annual Cost  EAC'
Equivalent annual cost (EAC) is the annual cost of owning, operating and maintaining an asset over its entire life. EAC is often used by firms for capital budgeting decisions, as it allows a company to compare the cost effectiveness of various assets that have unequal lifespans.
BREAKING DOWN 'Equivalent Annual Cost  EAC'
Equivalent annual cost (EAC) is used for a variety of purposes, in capital budgeting. But it is used most often to analyze two or more possible projects with different lifespans, where costs are the most relevant variable.
Other uses of EAC include calculating the optimal life of an asset, determining if leasing or purchasing an asset is the better option, determining the magnitude of which maintenance costs will impact an asset, determining the necessary cost savings to support purchasing a new asset, and determining the cost of keeping existing equipment.
Calculating the Equivalent Annual Cost and Example
The formula for calculating the EAC is straightforward. It is equal to net present value (NPV) divided by A(t,r), which is the present value annuity factor, taking into account r, the cost of capital, and t, the number of years in question. The resulting EAC allows managers to compare NPVs of differing projects over different periods, to accurately determine the best option.
The annuity factor A(t,r) is calculated as follows:
A(t,r) = (1  (1 / (1 + r) ^ t)) / r
As an example, consider two alternative investments in machinery equipment. Machine A has an initial capital outlay of $105,000. It has an expected lifespan of three years and an annual maintenance expense of $11,000. Machine B has an initial capital outlay of $175,000, an expected lifespan of five years, and an annual maintenance expense of $8,500. The cost of capital for the firm making the decision is 5%.
First, the A(t,r) of each project must be calculated. These calculations would be as follows:
Machine A A(t,r) = (1  (1 / (1 + 5%) ^ 3)) / 5% = 2.72
Machine B A(t,r) = (1  (1 / (1 + 5%) ^ 5)) / 5% = 4.33
Next, the initial costs must be divided by the A(t,r) and the annual maintenance cost added in. The resulting calculation is the EAC.
EAC Machine A = $105,000 / 2.72 + $11,000 = $49,557
EAC Machine B = $175,000 / 4.33 + $8,500 = $48,921
By standardizing the annual cost, a manager in charge of a capital budgeting decision where cost is the only issue would select Machine B, because it has an EAC that is $636 lower than Machine A.

Agreement Corporation
An agreement corporation is a type of bank chartered by a state ... 
Annualized Total Return
Annualized total return gives the yearly return of a fund calculated ... 
Adjusted Cost Base (ACB)
An adjusted cost base is the change in book value of an asset ... 
Nonpersonal Time Deposit
A nonpersonal time deposit account is an account held by corporate ... 
Equivalent Annual Annuity Approach ...
The equivalent annual annuity approach is one of two methods ...

Trading
Enter Profitable Territory With Average True Range
Find entry or exit signals or develop a complete system based on average true range. 
Investing
Understanding Marginal Cost of Production
Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit. 
Investing
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Insights
Fidelity Investments Names 2 Growth Opportunities for Investors
Machine learning and selfdriving vehicles are two great growth opportunities, according to Fidelity Investments. 
Investing
Analyzing Operating Margins
Learn how to analyze operating margins and how to put this aspect of equity analysis to work. 
Tech
Cloud Battle Gets More Intelligent (MSFT, AMZN)
It seems that machine learning technology is going to be the next battleground for market share within the cloud. 
Investing
The Costs of Investing
text 
Personal Finance
Can You Afford Not to Hire a Financial Advisor?
People often worry about how much a financial advisor costs instead of what it costs not to have one.

Which consumer goods do Americans buy the most of?
Explore the various factors that influence estimations of a tangible asset's useful life, as well as standard estimations ... Read Answer >> 
What are the types of costs in cost accounting?
Cost accounting aids in decisionmaking by helping a company's management evaluate its costs. There are various types of ... Read Answer >> 
How do I calculate production costs in Excel?
Find out about ways to use Excel to simplify production cost calculation and some sources of good templates and tips for ... Read Answer >> 
How do you calculate costs of capital when budgeting new projects?
Before budgeting for a new project, a company must assess the overall level of project risk relative to their normal business ... Read Answer >>