Component |
Description |
Net Present Value (NPV) |
The present value of cash flows generated by a project after accounting for the cost of capital. |
Capital Expenditure |
The initial cost of investment in a project. |
Life of the Project |
The duration over which the project will generate cash flows. |
Equivalent Annual Cost (EAC) |
The annual cost of owning and operating an asset over its entire lifespan. |
Formula |
EAC = NPV / Annuity Factor, where Annuity Factor = (1 – (1 + r)^-n) / r, and r is the discount rate, n is the number of years. |
Purpose |
Used to compare the cost-effectiveness of different projects or investments with varying lifespans and costs. |