How to Calculate Equivalent Annual Cost (EAC)

Step-by-Step Guide

1. 1

   Step 1: Determine the price of the asset.

   For example, suppose you are comparing two analyzers, A and B, costing $100,000 and $130,000, respectively.
   
   These are the Asset Prices. , Suppose Analyzer A is expected to last 5 years, while Analyzer B is expected to last 7 years.
   
   These are the number of Periods. , Discount rate is the cost of capital, or how much return your capital is required to generate each year.
   
   Say your organization uses a Discount Rate of 10%.
   
   Determine the annual maintenance costs for the asset.
   
   Suppose Analyzer A has an annual maintenance expense of $11,000, while Analyzer B has annual maintenance expense of $8,000. , It should be apparent that Analyzer B is the more cost effective option, with a net savings of $2,677.03 a year, compared to Analyzer A.
   
   For Analyzer A, EAC=$100,000∗0.10(1−(1+0.10)−5)+$11,000=$37,379.75{\displaystyle {\text{EAC}}=\$100,000*{\frac {0.10}{(1-(1+0.10)^{-5})}}+\$11,000=\$37,379.75} For Analyzer B, EAC=$130,000∗0.10(1−(1+0.10)−7)+$8,000=$34,702.72{\displaystyle {\text{EAC}}=\$130,000*{\frac {0.10}{(1-(1+0.10)^{-7})}}+\$8,000=\$34,702.72}
2. 2

   Step 2: Determine the expected lifespan for each.

3. 3

   Step 3: Determine your discount rate.

4. 4

   Step 4: Plug the numbers into the equation Asset Price x Discount rate / (1-(1+Discount Rate)^-Periods) + Annual Maintenance Costs.

Detailed Guide

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