Online Calculators since 2009
|Equivalent Annual Annuity Approach|
Are you confused about choosing a project that will help you expand your business? The Equivalent Annual Annuity (EAA) calculator can help you choose a project that will be most beneficial for your business.
The equivalent annual annuity approach is used for evaluation of projects that have unequal life spans. In other words EAA compares financial efficiency of different projects that are expected to have different life spans. This evaluates the constant average cash flow of a project during its entire life cycle as if it were an annuity.
Calculating EAA is a complex task since it includes the components that needs to be calculated before calculating the EAA. Thus, it is ideal to use this online calculator to do the calculations. Let's have a look at the details of the formula used in the calculations:
If you would like to calculate the Net Present Value, use the NPV Calculator.
An EAA calculator can support your business in many ways as it is online and very easy to use. The Equivalent Annual Annuity Calculator requires just a few inputs and clicks to show you the important numbers. It can also help you make comparisons between various projects of your company. Comparison can also be made by other companies, given they belong to the same industry.
The EAA calculator by iCalculator has been designed in a way that will do the complex calculation with just a fraction of the effort. You are only required to input the following details to do the calculation:
Once you have added the necessary financial information the calculator will provide you with EAA of the project that can be compared with other projects, to choose the most profitable projects from the various projects that you undertake.
The prime advantage of EAA ratio is that it considers 'time value of money'. The time spent waiting for the money to be collected is the money wasted. This means that if you receive a payment today, you can reinvest it today, and start making profits immediately, rather than receiving the same amount on a later date.
Also the EAA method is easier to apply than other available methods. You do not need to lay out the complete cash flow timeline for the entire life span of mutually exclusive projects. You just require the NPV of each project to calculate the EAA.
It shows that the investment with shorter life span has more profits as well as they can be reinvested for making more profits. Let's take an example: Consider two projects one has a 3 years term and NPV of 100k and the second has a 5 years term and NPV of 120k both projects are discounted at the same 6% rate.
The EAA calculator reflects that: option 1 has EAA of 37,410.98, and option 2 has 28,487.57
Project 1 is therefore a better financial option.
That said, EAA also has a few disadvantages, these include:
Despite the disadvantages, the EAA is quite a useful tool when it comes to comparing mutually exclusive projects with different life spans. You just have to consider the limitations before using the calculator. The most important thing to note is that the project with highest EAA should be accepted.
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