Equipment Replacement Equivalent Annual Cost (EAC) Calculator
An old press with four years left and a new one with ten cannot be compared by raw present value, because the longer asset simply covers more years. Equivalent annual cost spreads each option's present value cost into a level yearly amount, so the lower figure wins.
Your numbers
Opportunity cost of keeping it.
Include downtime and scrap cost that the new machine would avoid.
Your results
Pre-tax analysis. Assumes like-for-like capacity and output, repeatable replacement cycles, and year-end cash flows. Add tax effects and any output differences before a final decision.
Equivalent annual cost vs discount rate
Sweeps Discount rate from 4 to 20, holding your other inputs fixed.
Asset cost history review
Optional: discuss pulling maintenance and downtime cost per asset out of your ERP.
Optional. The tool and every export work without this. No spam.
How to use it
Enter the new machine cost, life, operating cost and salvage, then the old machine's resale value today, remaining life, operating cost and salvage. Include in operating cost the downtime, scrap and rework that the old machine causes, since that is usually why replacement is considered. Set a discount rate that reflects your hurdle rate. The result gives each machine's equivalent annual cost and the yearly saving from replacing.
The method behind it
Present value cost = purchase (or resale value forgone) + PV of operating costs - PV of salvage. Equivalent annual cost = present value cost divided by the annuity factor for that asset's life.
- Annuity factor = (1 - (1 + r) to the power minus n) / r.
- The old machine's purchase cost is sunk; use its resale value today as the opportunity cost.
- The lower EAC is the cheaper way to provide the same service per year.
- The method assumes each option can be repeated at the same cost.
Common mistakes
The most frequent error is using the old machine's book value, which is a sunk accounting figure and irrelevant to the decision. Another is leaving out hidden costs such as unplanned stoppages, quality escapes and operator time. Finally, check that both options deliver the same capacity. If the new machine adds capacity, include the contribution margin from that extra output, or the comparison will understate replacement.
Frequently Asked Questions
Why not just compare NPVs?
NPV favors the option that covers more years. EAC puts both on an annual footing, which is valid for unequal lives when the asset would be replaced repeatedly with an equivalent at similar cost.
Should book value matter?
No. Book value is a sunk cost. Only the cash realizable today and future cash flows matter. Tax on a sale below or above book value can matter, which you can add by adjusting the resale value.
How do I treat a major overhaul option?
Treat the overhaul cost as the 'purchase' for the old machine, add it to resale value today, and extend its remaining life and reduce its operating cost to reflect the overhauled condition.
Is a lower EAC always the right choice?
Not always. Strategic factors like capability for new products, technology risk, space and operator skills also matter. EAC tells you the cost-efficient answer when output and service are equal.
We can help pull maintenance work order history and downtime from your ERP or CMMS so the old machine's true running cost is on the page.
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