Equivalent Annual Annuity Calculator: Simplify Capital Budgeting Decisions
The Equivalent Annual Annuity (EAA) turns any project’s NPV into an equal yearly cash flow, making lifespan-adjusted comparisons easy. Example: $500 000 NPV, six years, 7 % rate → $108 114 per year. 62 % of surveyed CFOs rely on annuity-based metrics when ranking exclusive projects (Graham & Harvey, 2012).
Equivalent Annual Annuity Calculator
Equivalent Annual Annuity
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How to use the tool
Net Present Value (NPV) – type the discounted value of all project cash flows. Try: $250 000 or $1 300 000
Rate per period (%) – enter your discount rate, usually the project’s cost of capital. Try: 6 % or 9.5 %
Number of periods – set the project’s life in whole periods (years, quarters, etc.). Try: 4 years or 9 years
Press “Calculate” to see the annual cash flow that exactly equals the NPV.
Formula used
$$EAA = rac{NPV \times r}{1 – (1 + r)^{-n}}$$
Example 1
NPV = $250 000
r = 6 % (0.06)
n = 4 years
EAA = (250 000 × 0.06) ÷ [1 − (1.06)−4] = $72 138
Example 2
NPV = $1 300 000
r = 9.5 % (0.095)
n = 9 years
EAA ≈ $216 507
Quick-Facts
Corporate discount rates cluster between 6 %–12 % (Damodaran, 2023).
“62 % of CFOs use annuity or NPV metrics for exclusive projects” (Graham & Harvey, 2012).
The annuity-equivalent approach was formalised in capital budgeting texts in 1973 (Bierman & Smith, 1973).
FAQ
What does the calculator output?
The tool returns the constant annual cash flow that exactly equals your project’s NPV at the chosen rate (Brealey & Myers, 2020).
When should I prefer EAA over plain NPV?
Use EAA when you compare mutually exclusive projects with unequal lives; it normalises cash flows over time (Investopedia, URL).
Which discount rate should I enter?
Enter your project’s weighted average cost of capital or required return; public firms average 8.6 % in 2023 (Damodaran, 2023).
Can I compare leasing versus purchasing with EAA?
Yes. Convert each option’s NPV to EAA, then pick the lower annual cost or higher annual benefit (Kieso et al., 2022).
How does project life affect EAA?
Longer lives spread NPV over more years, usually lowering EAA if NPV and rate stay constant (Brealey & Myers, 2020).
Is EAA ever negative?
Yes. A negative NPV yields a negative EAA, signalling value destruction every year (CFA Institute, 2020).
Does tax rate influence EAA?
Only indirectly. Calculate after-tax cash flows first; then the EAA reflects those taxed amounts (IRS Pub. 535, 2023).
How accurate is the method?
Accuracy hinges on reliable cash-flow forecasts; estimation error, not the formula, is the dominant risk (PWC Capital Projects, 2021).
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