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Equivalent annual cost calculation, EAC | Free template

Equivalent annual cost calculation (EAC) is a free template to compare and take decisions on investments with the help of the method of equivalent annual cost for one or more investment alternatives.

An equivalent annual cost calculation may be appropriate to use when you have to compare investment alternatives with different economic lives.

An equivalent annual cost calculation is an investment calculation that distributes an initial investment and cash flow in equal annuities over the economic lifetime of the investment. If an investment alternative has irregular cash flows between periods you have to discount all future cash flows to present value before you start calculating annuities in an equivalent annual cost calculation. Annuities are periodic amounts of equal size consisting of both principal and interest, where the interest component is largest at the beginning and the amortization part is largest at the end. An equivalent annual cost calculation can be established for different periods, years, quarters or months. The total amount of all annuities are bigger when the period is year compared to if the period is month since repayments occur earlier when the period are months.

If an equivalent annual cost calculation solely consists of cash outflows, the investment alternative with the minimum annuity should be selected. The equivalent annual cost calculation method is appropriate to use when you have to compare various investment alternatives that have different economic lives. The equivalent annual cost method can for instance be used when the choice is between maintaining and keep an old machine or buying a new machine.

This template for equivalent annual cost calculation assumes real cash flows before tax. When estimating future cash inflows and cash outflows you should not make any compensation for inflation, nor shall any deduction for tax be made. When cash flows are real and the cost of capital rate used is adjusted for both inflation and taxes the cost of capital measure is a real cost of capital rate before tax.

The cost of capital rate is calculated as a weighted average of the return from shareholders and the average interest rate from lenders, WACC. The weighing of the capital from shareholders and lenders is made on the basis of how the investment will be financed.

You can use this template for equivalent annual cost calculation to establish an investment calculation to take a decision if an investment should be taken or which investment that should be taken.
Updated: 01-01-2015 | Created by

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