1. What is Annual Equivalent Cost?

The Annual Equivalent Cost (AEC) is a financial metric used to convert a present worth amount into an equivalent annual cost over a specified period. It helps in comparing investment alternatives with different time horizons and cost structures.

2. How Does the Calculator Work?

The calculator uses the AEC formula:

Where:

• \( AEC \) — Annual Equivalent Cost (dollars/year)
• \( PW \) — Present Worth (dollars)
• \( r \) — Interest Rate (decimal)
• \( n \) — Number of Years

Explanation: This formula converts a lump sum present value into an equivalent annual cost, considering the time value of money through the interest rate.

3. Importance of AEC Calculation

Details: AEC is crucial for capital budgeting decisions, equipment replacement analysis, and comparing projects with different lifespans. It provides a standardized way to evaluate long-term investments.

4. Using the Calculator

Tips: Enter present worth in dollars, interest rate as a decimal (e.g., 0.08 for 8%), and number of years. All values must be positive and valid.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between AEC and annual cost?
A: AEC considers the time value of money by converting present worth to equivalent annual costs, while simple annual cost doesn't account for interest rates.

Q2: When should I use AEC analysis?
A: Use AEC when comparing investment alternatives with different initial costs, lifespans, or when evaluating equipment replacement decisions.

Q3: How do I convert percentage interest rate to decimal?
A: Divide the percentage by 100. For example, 8% becomes 0.08, 12.5% becomes 0.125.

Q4: What if my project has salvage value?
A: For projects with salvage value, subtract the present worth of salvage value from the initial cost before calculating AEC.

Q5: Can AEC be used for revenue projects?
A: Yes, the same principle applies for annual equivalent revenue, where you convert present worth of benefits to equivalent annual benefits.