Equivalent annual cost

The annuity method is a method of the classic, dynamic investment calculation. The principal value of an investment is spread over the useful life of that payment sequence of deposits and withdrawals is converted to the so-called annuity. In contrast to the capital value that is not the total target value is determined, but the target value per period. The annuity factor is also the reciprocal of the annuity value factor.

The annuity method allows the evaluation of expansion and replacement investments in the sense of maximizing income.

Procedure

The annuity is a product of both capital and annuity:

The annuity factor (including capital recovery factor) is the reciprocal of the annuity value factor ( i: interest rate (eg 4.5 % = 0.045 ), n: length of use):

The unity of the annuity is money units (in the C used for currency) per period.

When using the annuity is an investment to assess positive if the annuity is greater than or equal to zero. In this case, you will receive at least the principal, interest at the discount rate used, back. In value terms, it is equivalent whether you get the capital value or over the life of the annuity distributed today.