Equivalent Annual Annuity (EAA)
Equivalent Annual Annuity (EAA)
Level end-of-year value whose present value equals the project NPV over n years at discount rate k.
When to use: Compare repeatable alternatives with comparable risk, equivalent service and consistent discount-rate assumptions. For nonrepeatable opportunities, compare NPVs over an appropriate common decision horizon.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| EAA | Equivalent Annual Annuity | Annual cash flow that would yield the same NPV over the project life | $ |
| NPV | Net Present Value | Present value of all cash flows discounted at the required rate | $ |
| k | Discount Rate | Cost of capital or required rate of return as a decimal (e.g. 0.10 for 10%) | % |
| n | Project Life | Number of years over which to spread the NPV | years |
Real-Life Examples
Example 1: 4-Year Project EAA
NPV is $267.95, discount rate 10%, project life 4 years.
Given
Step-by-Step
$84.53/year — the project is equivalent in value to receiving $84.53 per year for the 4-year life. Compare directly against another project's EAA regardless of differing horizons.
Example 2: Longer Project Comparison
A 10-year project has NPV $500. Discount rate 8%.
Given
Step-by-Step
$74.51/year. Despite the higher absolute NPV, the 4-year project above ($84.53/year) creates more annualized value — useful insight when ranking under capital constraints.
Frequently Asked Questions
No. Cash-flow amounts, timing, risk and discount rate determine NPV; duration alone does not.
When projects provide comparable benefits and can be repeated on comparable terms. Replication is a decision assumption, not a consequence of the arithmetic.
EAA equals NPV divided by the positive number of years.