Equivalent Annual Annuity Approach (EAA)

Equivalent Annual Annuity approach (EAA) is another sophisticated technique used in capital budgeting decisions. EAA determines the annual cost of the project over its economic life. It is determined by dividing net present value (NPV) of the project by the present value interest factor for annuity (PVIFAr,n) for a specific period and at a specific discount rate. PVIFAr,n can be found in financial tables.

EAA is helpful when a project has to be selected from mutually exclusive projects with unequal lives. The project with the highest Equivalent Annual Annuity (EAA) is more attractive. If two mutually exclusive projects have equal EAA than the project with the shorter economic life is more acceptable.

 

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