## Equivalent Annual Cost:

The equivalent annual cost converts the costs of a project over its life into an annuity, thus providing a more straightforward assessment of the project's costs. The equivalent annual cost is particularly useful when comparing projects with different lengths.

We can use the following formula to compute the equivalent annual cost:

• {eq}\displaystyle \frac{F*r}{1 - (1 + r)^{-T}} + C {/eq}

where {eq}F{/eq} is the initial cost, {eq}r{/eq} is discount rate, {eq}T{/eq} is the length of the project and {eq}C{/eq} is the annual cost.

For Philsbury 707, equivalent annual cost is:

• {eq}\displaystyle \frac{57,500*11\%}{(1 - (1 + 11\%)^{-5})} + 10,100 = 25,657.79 {/eq}

For Keeble CookieMunster, equivalent annual cost is:

• {eq}\displaystyle \frac{90,500*11\%}{(1 - (1 + 11\%)^{-7})} + 8,100 = 27,305.48 {/eq}