How this calculation works
Place the purchase at time zero, maintenance at every year end and salvage at the final year end. Discount that net cost stream, then divide by the present-value factor of a level end-year annuity.
EAC = [purchase + PV(maintenance) − PV(salvage)] / annuity PV factorA worked example
At zero discount, a ₹1,00,000 purchase, ₹10,000 annual maintenance for five years and ₹20,000 salvage give equivalent annual cost (100000+50000−20000)/5 = ₹26,000.
Good to know
No tax, depreciation deduction, financing, escalation or replacement-chain assumption is supplied. Comparing assets with unequal lives needs an additional common-service assumption. Negative net costs are retained if entered salvage exceeds the other present costs.
Reference: NIST: life-cycle cost timing and economic evaluation (opens in a new tab) ↗
Put purchase, maintenance and salvage on one clock
The straight line depreciation calculator allocates an entered depreciable cost across accounting years. That book expense is a different quantity from discounted equivalent annual economic cost.
The purchase occurs now. Maintenance occurs at each year end, including the last. Salvage is received only at the final year end. Discount these separate amounts before combining them into present net cost.
At zero discount, the default five-year example costs 100,000 + 5×10,000 − 20,000 = ₹1,30,000. Spreading that time-equivalent amount over five year-end payments gives ₹26,000 per year.
The present value calculator can check the final salvage discount, while this page also annualizes the complete purchase and maintenance stream.
An annual equivalent preserves present value
At a positive discount rate, simply dividing present cost by years is incorrect. Divide by the annuity present-value factor instead. A stream of that equivalent annual amount has the same present value as the original purchase and maintenance pattern.
The present value calculator discounts one future amount. The annual cash flow NPV calculator can inspect a more varied signed sequence; this page provides a convenient purchase-maintenance-salvage structure and converts its net cost to an annual equivalent.
Useful-life comparisons require a service assumption
Two assets with different lives cannot be compared fairly merely by placing their annual equivalents next to each other. A defensible common service period or repeat-replacement assumption must also be considered. This page does not invent that assumption.
Tax deductions, financing, price escalation and replacement timing can all change the cash flows. A large entered salvage can produce negative net cost; that result is retained so the assumption is visible rather than clipped away.
A few questions, answered
Why subtract salvage?
It is an inflow at the end of the asset life, offsetting part of the cost stream.
Is maintenance paid at the start of each year?
No. This model places every maintenance payment at year end.
Does a negative annual cost indicate an error?
Not necessarily. Entered salvage may outweigh the other discounted costs; review whether that assumption is credible.