Equivalent Annual Annuity

$"Cash flow" = (r*NPV)/(1-(1+ r )^(- n ))$

Enter a value for all fields

The equivalent annual annuity (EAA) is used in capital budgeting to show the net present value of an investment as a series of equal cash flows for the length of the investment. When used to compare projects with unequal lives, the one with the higher EAA should be selected.

The EAA approach uses a three-step process to compare projects:

Calculate each project's NPV over its lifetime.
Compute each project's EAA, such that the present value of the annuities is exactly equal to the project NPV.
Compare each project's EAA and select the one with the highest EAA.

EXAMPLE

Suppose a company with a weighted average cost of capital (WACC) of 10% is comparing two projects, X and Y. Project X has a NPV of $3 million and an estimated life of five years, while Project Y has a NPV of $2 million and an estimated life of three years. Using the calculator above, Project X will yield an EAA of $791,392.44, and Project Y an EAA of $804,229.61. Under the EAA approach, Project Y would be selected since it has the higher equivalent annual annuity value.