The Equivalent Annual Cost (EAC) is a financial calculation used to compare the total cost of owning or operating a piece of equipment over its entire lifespan, to the cost of owning or operating a similar piece of equipment for one year. The formula for EAC is:
EAC = (AP * DR) / (1 – (1 + DR)^-n)
- AP is the Asset Price or the initial cost of the equipment
- DR is the Required Return Rate, or the discount rate used to calculate the present value of future costs
- n is the Number of Periods or the lifespan of the equipment in years
The EAC calculation takes into account not only the initial cost of the equipment, but also any ongoing costs such as maintenance, repairs, and replacement parts. By comparing the EAC of different pieces of equipment, a company can make a more informed decision about which equipment will be the most cost-effective to operate over its lifespan.
It’s important to note that the EAC calculation is used as a comparison tool and it’s not a standalone metric to decide if a project is viable or not. Other factors such as revenue, cash flow, and return on investment (ROI) should also be considered when making investment decisions.