What is the equivalent annual annuity formula?

The equivalent annual annuity formula 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. The net present value (NPV) formula shows the present value of an investment that has uneven cash flows.

What is equivalent annual annuity (EAA)?

Equivalent Annual Annuity (or EAA) is a method of evaluating projects with different life durations. Traditional project profitability metrics such as NPV, IRR, or payback period provide a very valuable perspective on how financially viable projects are overall. EAA is a metric used to determine how financially efficient projects are.

What is the equivalent annual annuity approach?

The equivalent annual annuity approach is used for evaluation of projects that have unequal life spans. In other words EAA compares financial efficiency of different projects that are expected to have different life spans. This evaluates the constant average cash flow of a project during its entire life cycle as if it were an annuity.