Learn How to Calculate Equivalent Annual Annuity Approach - Tutorial

How to Calculate EAA - Definition, Formula and Example

Definition

The equivalent annual annuity (EAA) approach evaluates the constant annual cash flow produced by a project over its lifetime .EAA is used in capital budgeting to find the net present value of an investment. The present value of the constant annual cash flow is equal to the project's net present value.

Formula :

C = r (NPV) / 1 - (1 + r)-n
where,
C denotes Equivalent Annuity Cash Flow, NPV denotes Net Present Value, r denotes Rate Per Period, n denotes Number of Periods.
Example :
Given,
Net Present Value(NPV)= 100,000
Rate Per Period(r)= 8 % = 0.08
Number of periods(n)= 4 years
To find,

Equivalent Annuity Cash Flow(C)

Solution:

Substitute the values of NPV, r and n in the formula, C = 0.08 *(100,000) / (1 - (1 + 0.08)-4) C = 8000 / (1 - (1 + 0.08)-4) C = 30,192.08

Learn how to calculate the Equivalent Annual Annuity in this tutorial, given with the definition, formula and example.

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