ACCA FM · Chapter 8 · Question 2 of 10
Why is the equivalent annual cost (EAC) method used when deciding how often to replace an asset?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It allows replacement cycles of different lengths to be compared on a like-for-like annual basis
Explanation
Replacement cycles of different lengths cannot be compared by their total PV of costs because a longer cycle naturally has a higher total. Dividing the PV of each cycle by the annuity factor for its length converts it into an equivalent constant annual cost, assuming the cycle is repeated indefinitely. The cycle with the lowest EAC is chosen.
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