To evaluate the project performance capital budgeting tools are used like internal rate of return (IRR), Average rate of return (ARR), discounted payback period, Net Present Value (NPV) etc. these tools are also used to make a decision to invest in those big projects( which needs huge amount to invest) or not? These tools are helpful to compare two or more than two projects whose time interval of cash flows are same to know which project is more beneficial for the company. But these tools are not beneficial to use when the time period of the cash inflow are not same. In that case equivalent annual annuity is used. Equivalent Annual annuity: It is used when projects are mutually exclusive. The time interval of cash inflows of projects is differ from one another. With the help of it we can find the measure each projects correctly according to their cash flows in given period. Formula: EAA = NPV*r / 1-(1+r) ^-n Where as EAA = Equivalent Annual Annuity NPV = Net Present V
This blog is totally for education purpose which helps to solve finance related numerical like time value of money, annuity ,perpetuity, technique of capital budgeting, cost of capital, working capital management and hire purchase etc.