Scenario Comparison
Equipment Investment Comparison
Use EAC and EAA to compare the equivalent annual costs and net benefits of equipment investments with unequal useful lives.
Set comparison conditions
Hypothetical equipment; all amounts use one currency. Annual costs and benefits occur at year end; salvage is recovered at each machine’s own terminal date.
Equipment A
Terminal salvage setting
Equipment B
Terminal salvage setting
Compare on a common annual basis
Equipment A · EAC
43,842.68 / year
Cost PV: 112,986.84
Annuity factor: 2.5771
Lower equivalent annual cost
Equipment B · EAC
44,210.46 / year
Cost PV: 204,379.64
Annuity factor: 4.6229
Under these assumptions, equipment A has the lower equivalent annual cost, by 367.78 per year.
| Component | Equipment A | Equipment B |
|---|---|---|
| Purchase cost | 90,000.00 | 180,000.00 |
| Operating-cost PV | 30,925.16 | 36,983.04 |
| Less: salvage PV | −7,938.32 | −12,603.39 |
| Cost present value | 112,986.84 | 204,379.64 |
- Equipment A EAC
- Equipment B EAC
Chart data
| Observation | Equipment A EAC | Equipment B EAC |
|---|---|---|
| 0% | 38,666.67 | 34,666.67 |
| 5% | 41,876.69 | 40,522.79 |
| 10% | 45,169.18 | 46,737.18 |
| 15% | 48,538.16 | 53,277.91 |
| 20% | 51,978.02 | 60,112.92 |
Actual cash-flow timeline
- Purchase now · 0Purchase outflow−90,000.00
- Annual operations / benefits · Years 1–3Annual operating outflow-12,000.00
- End of useful life · 3Additional salvage inflow+10,000.00
The timeline shows assumed actual receipts and payments, not EAC/EAA as if they were real annual cash flows.
How to read the results
Different useful lives cover different service periods. EAC discounts costs to today, then converts that present value into an equivalent annual amount. Lower EAC is normally preferable for comparable services; discount rates and operating costs can change the ranking.
Under these assumptions, equipment A has the lower equivalent annual cost, by 367.78 per year.
EAA starts with net benefits: discount annual benefits, subtract costs to obtain NPV, then annualize it. Higher EAA is normally preferable. It is not simply a new name for a positive EAC.
Method and assumptions
C is acquisition cost, M annual year-end operating cost, S terminal salvage, R annual year-end benefit, r the effective annual discount rate and n useful life. At zero interest AF=n. Cost PV and EAC can be negative if salvage offsets exceed costs; revisit those assumptions.
Scope and model limitations
Cost comparison assumes comparable capacity and quality, with replacement available on broadly comparable real terms. A three-year machine is replaced in year 3; a six-year machine in year 6. If either is a one-off purchase, technology will change materially, or service is needed for only four years, use an explicit common planning horizon with appropriate replacement and terminal values instead.
Use consistent monetary and discounting assumptions. Differences in inflation, tax, risk or downtime belong in the cash flows; an EAC or EAA number alone cannot establish the best decision.
Frequently asked questions
Why not compare total spending?
Different lives cover different service periods, and money at different dates has different present value.
Is EAC an actual yearly bill?
No. It is a level year-end equivalent of cost present value. Actual payments follow the acquisition, operation and salvage schedule.
When should I use EAA?
When benefits differ and the comparison assumptions hold, annualize each NPV to compare net benefit; higher is normally preferable.