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Definition
Equivalent annual cost (EAC) is a financial metric used to compare the costs of different investment projects or assets over a specified period, typically on an annual basis.
What is equivalent annual cost?
Equivalent annual cost helps in evaluating the total cost of ownership or investment allowing for easier comparison of projects with different lifespans, cash flow patterns, or initial costs.
EAC allows for a direct comparison between projects or investments that have different time horisons, cash flow patterns, or initial costs. Furthermore, EAC is a valuable tool in capital budgeting, helping decision-makers evaluate which investment option provides the most cost-effective solution
EAC assumes a constant annual cost, which may not always reflect the actual cash flows in real-world situations. It also assumes a constant discount rate, which may not hold in dynamic economic environments.
