1. What is Equivalent Annual Annuity?

The Equivalent Annual Annuity (EAA) method converts the net present value of projects with different lifespans into equivalent annual cash flows, allowing for direct comparison between investment alternatives with varying time horizons.

2. How Does the Calculator Work?

The calculator uses the EAA formula:

Where:

• \( EAA \) — Equivalent Annual Annuity (currency/year)
• \( NPV \) — Net Present Value (currency)
• \( r \) — Discount Rate (decimal)
• \( n \) — Project Lifespan (years)

Explanation: The formula converts a lump-sum NPV into an equivalent annual cash flow stream, making projects with different durations comparable on an annual basis.

3. Importance of EAA Calculation

Details: EAA is crucial for capital budgeting decisions when comparing projects with unequal lives. It helps identify which investment provides the highest annual return over its lifespan, ensuring optimal resource allocation.

4. Using the Calculator

Tips: Enter NPV in currency units, discount rate as a decimal (e.g., 0.08 for 8%), and project lifespan in years. All values must be positive and valid.

5. Frequently Asked Questions (FAQ)

Q1: When should I use EAA instead of NPV?
A: Use EAA when comparing projects with different lifespans. For projects with equal lives, NPV alone is sufficient for comparison.

Q2: What discount rate should I use?
A: Typically use the company's cost of capital or the required rate of return for similar investments.

Q3: Can EAA be negative?
A: Yes, if the NPV is negative, the EAA will also be negative, indicating the project destroys value annually.

Q4: How does project lifespan affect EAA?
A: Longer project lifespans generally result in lower EAA values for the same NPV, as the value is spread over more years.

Q5: Is EAA the same as annual cash flow?
A: No, EAA represents the equivalent constant annual cash flow that would give the same NPV as the actual cash flow pattern.