Equivalent Annual Annuity

That is the calculation translates return into an equivalent annual rate.

Equivalent annual annuity. It is used when projects are mutually exclusive. In simple words EAA shows the net present value of an investment as a series of equal cash flows produced by a project over its lifetime. The equivalent annual annuity approach is used for evaluation of projects that have unequal life spans.

When used to compare projects with unequal lives the one with the higher EAA should be selected. 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 and maintenance cost by the present value of annuity factor. The net present value NPV formula shows the present value of an investment that has uneven cash flows.

What is an Equivalent Annual Annuity. If you are evaluating several competing investments with different life cycles then you should also include a calculation known as Equivalent Annual Annuity EAA. EAC is often used by firms for capital budgeting decisions as it allows a.

The equivalent annual annuity approach is one of two methods used in capital budgeting to compare mutually exclusive projects with unequal lives. Where project One has a 7 year term and project Two has a 16 year term. Equivalent annual cost EAC is the annual cost of owning operating and maintaining an asset over its entire life.

Equivalent Annual Annuity EAA. For example assume Shoeburger Corp has the option to pursue two different projects. With the help of it we can find the measure each projects correctly according to their cash flows in given period.

An approach that helps you grow your business. Equivalent Annual annuity. In this way all investments can be compared and assessed on equal terms.