How to Calculate Annual Equivalent Cost

Annual Equivalent Cost Formula:

\[ AEC = (Initial\ Cost \times CRF) + Annual\ Operating\ Cost - Salvage\ Value \times SFF \]

Initial Cost:

currency

Capital Recovery Factor (CRF):

unitless

Annual Operating Cost:

currency

Salvage Value:

currency

Sinking Fund Factor (SFF):

unitless

Annual Equivalent Cost (AEC):

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1. What is Annual Equivalent Cost?

Annual Equivalent Cost (AEC) is a financial metric used in life-cycle costing to convert all costs associated with an asset into an equivalent annual amount. This allows for easier comparison between investment alternatives with different lifespans and cost structures.

2. How Does the Calculator Work?

The calculator uses the AEC formula:

\[ AEC = (Initial\ Cost \times CRF) + Annual\ Operating\ Cost - Salvage\ Value \times SFF \]

Where:

\( AEC \) — Annual Equivalent Cost (currency/year)
\( Initial\ Cost \) — Upfront investment cost (currency)
\( CRF \) — Capital Recovery Factor (unitless)
\( Annual\ Operating\ Cost \) — Yearly operating expenses (currency)
\( Salvage\ Value \) — End-of-life value (currency)
\( SFF \) — Sinking Fund Factor (unitless)

Explanation: The formula converts the initial investment into an equivalent annual cost using CRF, adds annual operating costs, and subtracts the annual equivalent of the salvage value using SFF.

3. Importance of AEC Calculation

Details: AEC is crucial for investment decision-making, equipment replacement analysis, and life-cycle cost comparisons. It helps organizations make informed choices about capital investments by providing a standardized annual cost metric.

4. Using the Calculator

Tips: Enter all costs in the same currency unit. CRF and SFF are time-value-of-money factors that depend on the interest rate and project lifespan. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is the Capital Recovery Factor (CRF)?
A: CRF converts a present value into a series of equal annual payments over a specified period, considering the time value of money.

Q2: What is the Sinking Fund Factor (SFF)?
A: SFF calculates the annual deposit needed to accumulate a future amount, considering compound interest.

Q3: When should I use AEC analysis?
A: Use AEC when comparing investment alternatives with different lifespans, initial costs, and operating expenses.

Q4: How do I calculate CRF and SFF?
A: CRF = i(1+i)^n/((1+i)^n-1) and SFF = i/((1+i)^n-1), where i is interest rate and n is number of periods.

Q5: What are the limitations of AEC?
A: AEC assumes constant annual costs and may not capture variable operating expenses or inflation effects accurately.