what is the equivalent annual annuity eaa approach 
the equivalent annual annuity eaa approach is one of two methods used in capital budgeting to compare mutually exclusive projects with unequal lives the eaa approach calculates the constant annual cash flow generated by a project over its lifespan if it were an annuity when used to compare projects with unequal lives an investor should choose the one with the higher eaa understanding the equivalent annual annuity eaa approachthe eaa approach uses a three step process to compare projects the present value of the constant annual cash flow is exactly equal to the project s net present value npv the first thing an analyst does is calculate each project s npv over its lifetime after that they compute each project s eaa so that the present value of the annuities is exactly equal to the project s npv lastly the analyst compares each project s eaa and selects the one with the highest eaa for example let s say a company with a weighted average cost of capital of 10 is comparing two projects a and b project a has an npv of 3 million and an estimated life of five years while project b has an npv of 2 million and an estimated life of three years using a financial calculator project a has an eaa of 791 392 44 and project b has an eaa of 804 229 61 under the eaa approach the company would choose project b since it has the higher equivalent annual annuity value calculating the equivalent annual annuity approach eaa often an analyst will use a financial calculator with the typical present value and future value functions to find the eaa an analyst can use the following formula in a spreadsheet or with a non financial calculator with exactly the same results 