Equivalent Annual Annuity Approach (EAA) Overview and Formulas

The equivalent annual annuity approach is a method used in capital budgeting to compare projects with different lifespans. It calculates the constant annual cash flow generated by a project over its lifespan if it was an annuity. When used to compare projects with unequal lives, an investor should choose the one with the higher EAA. Often, an analyst will use a financial calculator, using the typical present value and future value functions to find the EAA.
c4a8