Definition for : Equivalent annual cost method

When a company has to choose between two projects of two different lengths and with different operating Costs, it should reason on an equal-life basis. This choice can be made using the equivalent annual Cost method, a technique based on the following steps: calculate the Present value of the Costs of each of the two projects; determine the equivalent annual Cost of the single payment represented by the PV of the Costs of the two projects; choose the project with the lower equivalent annual Cost.

(See Chapter 16 The time value of money and net present value of the Vernimmen)

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