Equivalent Annual Cost (EAC) is the cost per year of owning an asset over it's entire lifespan.

It is often used as a decision making tool when comparing objects of unequal lifespans.

*A practical example

A manager must decide on which machine to purchase:

Machine A Investment cost 50000$ Expected lifetime 3 years Annual maintainance 13000$

Machine B Investment cost 150000$ Expected lifetime 8 years Annual maintainance 7500$

The cost of capital is 5%

The EAC for Machine A is: (50000$*A^(3,5))+13000$=31360$ The EAC for Machine B is: (150000$*A^(8,5))+7500$=30780$

Where A is the inverse annuity factor for t years and 5% cost of capital.

Alternatively the manager can use the NPV method under the assumption that the machines will be replaced for the same investment fee. The time horizon used in the NPV comparison must be set to 24 years (3*8=24) thus it becomes a slightly more complicated operation to perform than calculating the EAC. Net present value is a form of calculating discounted cash flow. ... Net present value is a form of calculating discounted cash flow. ...