1. What is the Annual Equivalent Cost?

The Annual Equivalent Cost (AEC) is a financial metric that converts the net present value (NPV) of a project or investment into an equivalent annual amount. It's useful for comparing projects with different lifespans or cost structures.

2. How Does the Calculator Work?

The calculator uses the AEC formula:

Where:

• \( NPV \) — Net Present Value in dollars
• \( r \) — Discount rate (as decimal)
• \( n \) — Number of years

Explanation: The formula essentially spreads the NPV over the project's lifetime as equal annual payments, accounting for the time value of money.

3. Importance of AEC Calculation

Details: AEC is crucial for capital budgeting decisions, allowing comparison between projects with different durations and cost patterns on an equivalent annual basis.

4. Using the Calculator

Tips: Enter NPV in dollars, discount rate as a decimal (e.g., 0.05 for 5%), and number of years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: When should I use AEC instead of NPV?
A: Use AEC when comparing projects with different lifespans or when you need to express costs as annual amounts for budgeting purposes.

Q2: How does discount rate affect AEC?
A: Higher discount rates reduce the present value of future costs, typically resulting in lower AEC values.

Q3: Can AEC be used for revenue projects?
A: Yes, the concept can be applied to both costs and revenues, though it's more commonly used for cost comparison.

Q4: What are the limitations of AEC?
A: AEC assumes constant annual costs and may not capture irregular cash flow patterns well.

Q5: How does project lifespan affect AEC?
A: Longer projects typically have lower AEC because costs are spread over more years, but this depends on the discount rate.