what is the equivalent annual cost eac 
equivalent annual cost eac is the annual cost of owning operating and maintaining an asset over its entire life firms often use eac for capital budgeting decisions as it allows a company to compare the cost effectiveness of various assets with unequal lifespans in a process known as the replacement chain method investopedia mira norianunderstanding the equivalent annual cost eac equivalent annual cost eac is used for a variety of purposes including capital budgeting but it is used most often to analyze two or more possible projects with different lifespans where costs are the most relevant variable other uses of eac include calculating the optimal life of an asset determining if leasing or purchasing an asset is the better option determining the magnitude of which maintenance costs will impact an asset determining the necessary cost savings to support purchasing a new asset and determining the cost of keeping existing equipment the eac calculation factors in a discount rate or the cost of capital cost of capital is the required return necessary to make a capital budgeting project such as building a new factory worthwhile cost of capital includes the cost of debt and the cost of equity and is used by companies internally to judge whether a capital project is worth the expenditure of resources the formula for the equivalent annual cost eac asset price discount rate 1 1 discount rate n where discount rate return required to make project worthwhile n number of periods begin aligned text eac frac text asset price times text discount rate 1 1 text discount rate n textbf where text discount rate text return required to make project text worthwhile n text number of periods end aligned eac 1 1 discount rate nasset price discount rate where discount rate return required to make projectworthwhilen number of periods 