What is Equivalent Annual Cost (EAC)?

The Equivalent Annual Cost (EAC) is a financial metric used in capital budgeting to compare the cost-effectiveness of two or more assets with different lifespans. By converting the net present value of an investment into an annualized amount, EAC allows business owners and financial analysts to determine which option is more economical over time. It essentially answers the question: "How much does this asset cost me per year to own and operate?"

How to Use the EAC Calculator

Using our Equivalent Annual Cost Calculator is straightforward. Simply enter the initial purchase price of the asset, the estimated useful life in years, the discount rate (usually your company's cost of capital or a desired interest rate), and the recurring annual maintenance or operating costs. The calculator will automatically apply the annuity formula to provide you with a single annual figure that accounts for both the initial investment and ongoing expenses.

Why is EAC Important in Decision Making?

In many scenarios, a cheaper asset might have a shorter lifespan or higher maintenance costs than a more expensive alternative. Using simple total cost figures is misleading because the timing of cash flows differs. EAC solves this by normalizing the costs. It is particularly useful for replacement decisions—calculating when it is more cost-effective to keep an old machine versus buying a new, more efficient one. It is also a staple in project management when choosing between competing technology stacks or manufacturing equipment.

Frequently Asked Questions

What is the EAC formula?

The formula for EAC is: EAC = [Asset Price × Discount Rate] / [1 - (1 + Discount Rate)^-n] + Annual Operating Costs, where n is the number of years. This represents the annuity that has the same present value as the asset's costs.

Should I include salvage value?

Yes, if the asset has a salvage value at the end of its life, you would typically subtract the present value of that salvage value from the initial purchase price before calculating the EAC. This calculator focuses on the standard cost-based model.