How to Calculate the Equivalent Annual Cost

by Rick Paulas - Updated September 26, 2017

Equivalent annual cost is a business term describing the annual cost of an investment or asset based upon its lifetime costs. For example, you could calculate the EAC of a three-year investment to find out the cost for each year. This is useful when comparing the annual costs of investments that cover different periods of time.

Add the loan repayment percentage to 1. For example, if the loan repayment percentage is 5% then, 1 plus 0.05 equals 1.05. Then, take that number to the power of the number of years of the loan. In the example, if the loan is for 3 years, then it is 1.05 to the 3rd power, which equals 1.157625.

Divide 1 by the number we just found (1.157625) which would equal 0.8638376. Now subtract the number we just found (0.8638376) from 1 to get 0.1361624. Finally, divide that number (0.1361624) by the original loan percentage (0.05) to get the loan repayment factor. In our example, 0.1361624 divided by 0.05 equals 2.723248, which is the loan repayment factor.

Divide the investment cost by the loan repayment factor. In our example, the investment cost is $100,000. That means $100,000 divided by 2.723248 equals $36,720.86.

Add the cost of the annual maintenance for one year's time. In our example, that is $10,000. That means $36,720.86 plus $10,000 equals $46,720.86. That is the equivalent annual cost, or the cost that the investment will cost the owner on a yearly basis.

About the Author

Rick Paulas is a freelance writer based out of Los Angeles. He has been writing professionally since 2005. He has previously written for "McSweeney's," ESPN.com, "Vice Magazine" and "Radar Magazine," and has worked as an editor for "The Coming," "Duct Tape & Rouge," and "TSB Magazine." Paulas holds a Bachelor of Arts in telecommunications and advertising from Michigan State University.

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