Equivalent Annual Cost (EAC) Calculator
Compare two machines, vehicles or appliances with different prices and lifespans: the equivalent annual cost (EAC) turns purchase price, salvage value and running costs into one comparable yearly cost.
How it works
EAC = [P − S × (1 + r)⁻ⁿ] × CRF + C · CRF (capital recovery factor) = r ÷ [1 − (1 + r)⁻ⁿ] · P = purchase price, S = salvage value, C = yearly operating cost, n = life in years, r = discount rate · choose the option with the lower EAC
When two assets last different numbers of years, comparing their total costs is misleading: the longer-lived one looks more expensive simply because it serves you longer. The equivalent annual cost spreads the purchase price (net of the discounted salvage value) over the asset’s life with the capital recovery factor and adds the yearly running costs, giving the level annual payment that has the same present value as owning the asset. It is the standard engineering-economics and capital-budgeting method for replacement and “buy which one” decisions, and it assumes each option can be replaced with a similar one when it wears out.
Worked example
At a 7% discount rate, option A costs 30,000, lasts 8 years, is worth 5,000 at the end and costs 2,000 a year to run. Its capital recovery factor is 0.07 ÷ (1 − 1.07⁻⁸) = 0.16747, so its capital cost is (30,000 − 5,000 × 1.07⁻⁸) × 0.16747 = 4,536.69 a year and its EAC is 4,536.69 + 2,000 = 6,536.69. Option B (18,000, 5 years, 3,000 salvage, 2,800 a year) has a CRF of 0.24389, a capital cost of 3,868.36 and an EAC of 6,668.36. Although B is cheaper to buy, A is cheaper by 131.67 a year.
Sources: Corporate Finance Institute — Equivalent annual cost · Wikipedia — Equivalent annual cost
Frequently asked questions
When should I use equivalent annual cost instead of NPV?
Use EAC when the options have different lifespans and would be replaced again at the end. NPV over each life favours the shorter-lived option unfairly; EAC compares them on the same yearly basis.
What discount rate should I use?
Use your cost of capital: the interest rate on the loan that would finance the purchase, or the return you give up by not investing the cash. For households a savings or loan rate works; companies use their WACC.
What is the capital recovery factor?
It is the factor that turns a present amount into an equal annual series over n years at rate r — the same factor a lender uses to compute a loan payment. A 30,000 asset at 7% over 8 years has a CRF of about 0.1675, so recovering its capital costs about 5,024 a year.
Should taxes and inflation be included?
For a business, use after-tax costs and include depreciation tax savings. If you use real (inflation-adjusted) operating costs, use a real discount rate too; mixing nominal and real numbers distorts the result.
Related calculators
Educational estimate, not financial advice. Real contracts, fees, taxes, day-count and rounding rules differ — check the official cost disclosure and your agreement before deciding.