Equivalent Annual Annuity Approach (EAA)

The equivalent annual annuity approach (EAA) is a method for comparing investments with different cash flow streams. It is used to determine which investment has the higher present value. The EAA is calculated by finding the annual annuity that has the same present value as the investment.

The EAA is a useful tool for comparing investments with different cash flow streams because it allows investors to compare the investments on a like-for-like basis. The EAA can also be used to compare investments with different risk profiles.

To calculate the EAA, you first need to find the present value of the investment. This can be done using the following formula:

Present value = \frac{Future value}{(1 + interest rate)^n}

where:

• Present value is the value of the investment today
• Future value is the value of the investment in the future
• Interest rate is the rate of interest that is used to discount the future value
• n is the number of years until the investment matures

Once you have the present value of the investment, you can find the EAA by dividing the present value by the number of years until the investment matures.

EAA = \frac{Present value}{Number of years}

The EAA is a useful tool for comparing investments with different cash flow streams. It can be used to determine which investment has the higher present value and to compare investments with different risk profiles.