Analysis of the Net Present Value and Equivalent Annual Cost in Optimal Machine Life

Abstract

Both net present value (NPV) and equivalent annual cost (EAC) are appropriate methods for modifying an investment project. While Net Present Value may assist investors in evaluating the project's cash flows, EAC illustrates the cost of several projects over a year. The purpose of this research is to discover whether one of the two metrics, NPV or EAC, is superior. Net Present Value is the difference between the present value of cash flows and the present value of cash flows after a period. The annual cost of ownership, operation, and maintenance are equivalent. To establish whether NPV or EAC is the more appropriate technique for adjusting investment projects, this essay use them to estimate the optimal machine life. After evaluating the calculation procedure for this issue and using these two approaches, the findings indicate that EAC is more appropriate for investment projects with varying durations. These findings imply that net present value is more appropriate for estimating the cost of a project over a specified period; thus, when dealing with investments with varying life spans, equivalent annual cost is a better option than net present value.