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Wize University Introduction to Finance Textbook > Capital Budgeting

Equivalent Annual NPV

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Equivalent Annual NPV (EANPV)

A way to compare projects is by finding the net present value of the individual projects and then determining the amount of an annual annuity that is economically equivalent to the NPV generated by each project over its respective time period.

Steps to find EANPV

  1. Find NPV
  2. Set NPV = PV and solve for PMT
Example:
A project with an NPV of $10,000 that takes 10 years is equivalent to $1,295.05 per year if the cost of capital is 5%. A 1-year investment with an NPV of $2,000 is significantly better although it has a much lower total NPV.
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Example: Equivalent Annual Net Present Value (EANPV)

A company is considering three separate, mutually exclusive projects, A, B, and C. Project A requires a $10,000 cash outlay today and is expected to generate after‐tax cash flows of $7,000 in year 1 and $6,000 in year 2. Project B requires an $8,500 cash outlay today and is expected to generate after‐tax cash flows of $4,000 in year 1 and $7,000 in year 2. Project C requires a $10,600 cash outlay today and is expected to generate after-tax cash flows of $5,000 for each of the next three years. Assume that 15 percent is the appropriate discount rate, compute the EANPV of each project.



Practice: Equivalent Annual Net Present Value (EANPV)

You are considering two investments: Investment A will require an initial investment of $120,000 and will return $40,000 per year for 5 years. Investment B will require an initial investment of $250,000 and will return $43,000 per year for 10 years. Your cost of capital is 10%.
What is the EANPV of Investment A?
(Round final answer to 2 decimal places)