How to calculate the equivalent annual cost

Written by rick paulas
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How to calculate the equivalent annual cost
(Calculator image by Alhazm Salemi from

"Equivalent Annual Cost" is a term in business used to describe how much money per year an investment or asset costs the owner over the lifespan of that asset. For example, if an owner had an three-year investment, the equivalent annual cost would calculate how much the investment costs that owner for a single year. This is useful when comparing the yearly cost of investments that cover different periods of time.

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  1. 1

    Find the loan repayment factor. To do so, add the loan repayment percentage to 1. For example, if the loan repayment percentage is 5% then, 1 plus 0.05 equals 1.05. Then, take that number to the power of the number of years of the loan. In the example, if the loan is for 3 years, then it is 1.05 to the 3rd power, which equals 1.157625. Divide 1 over the number we just found (1.157625) which would equal 0.8638375. Now take 1 and subtract the number we just found (0.8638375) from it to get 0.1361625. Finally, divide that number (0.1361625) by the original loan percentage (0.05) to get the loan repayment factor. In our example, 0.1361625 divided by 0.05 equals 2.7235, which is the loan repayment factor.

  2. 2

    Divide the investment cost by the loan repayment factor. In our example, the investment cost is £65,000. That means 100,000 divided by 2.7235 equals £23,866.30.

  3. 3

    Add the cost of the annual maintenance for one year's time. In our example, that is £6,500. That means £23,866.30 plus £6,500 equals £23,866.30. That is the equivalent annual cost, or the cost that the investment will cost the owner on a yearly basis.

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