When weighing up major investments—whether it’s new machinery for your business, solar panels for your home, or technology upgrades—getting the financial comparison right is essential. The Equivalent Annual Cost (EAC) method has become the gold standard for comparing projects with different lifespans, costs, and maintenance schedules. But with Australia’s 2025 financial landscape bringing new tax depreciation rates and capital allowances, understanding EAC is more valuable than ever.
What is Equivalent Annual Cost (EAC)?
Equivalent Annual Cost translates the total cost of a project or asset into an annual figure. This allows you to make a true like-for-like comparison between options that might have different upfront costs, useful lives, or ongoing expenses. Instead of getting lost in lump sum estimates or complex spreadsheets, EAC boils it all down to a single yearly figure—making decisions simpler and smarter.
For 2025, as Australian businesses and households face shifting economic conditions and updated tax rules, EAC is an essential tool for capital budgeting and investment planning. Whether you’re a CFO, a small business owner, or a savvy homeowner, the EAC approach helps you see the real annual impact of your choices.
How to Calculate EAC: The Formula and a Real-World Example
- Step 1: Calculate the Net Present Value (NPV) of all costs over the project’s life, including purchase price, maintenance, and operating costs.
- Step 2: Use the EAC formula:
EAC = NPV / Annuity Factor
The annuity factor is based on the project’s lifespan and the discount rate (reflecting the cost of capital or prevailing interest rates).
Example (2025): Imagine a business considering two delivery vans. Van A costs $50,000, lasts 8 years, and has $2,000 annual maintenance. Van B costs $38,000, lasts 5 years, but needs $3,500 per year in upkeep. With a discount rate of 6% (reflecting 2025’s prevailing business loan rates), the EAC calculation brings clarity:
- NPV of Van A’s costs: $50,000 + (PV of maintenance over 8 years)
- NPV of Van B’s costs: $38,000 + (PV of maintenance over 5 years)
- Convert each NPV to an annual cost using the annuity factor for their respective lifespans
The van with the lower EAC is the smarter financial choice—regardless of upfront sticker price.
Why EAC Matters More in 2025: New Rules and Practical Impacts
In 2025, several changes have sharpened the focus on EAC for Australians:
- Updated Depreciation Schedules: The ATO has revised depreciation rates for key asset classes, including vehicles, plant, and IT equipment. This changes the annual cost profile of many investments.
- Instant Asset Write-Off Adjustments: The government’s asset write-off threshold for small businesses has shifted again, altering the tax impact of large purchases. EAC helps factor in these one-off benefits versus ongoing costs.
- Higher Interest Rates: With the RBA maintaining a cash rate above 4.0% in early 2025, the discount rate you use in EAC calculations is more consequential—affecting the annualised cost and your final decision.
- Inflation Pressure: Ongoing inflation means that maintenance and operating costs are rising faster. EAC captures these ongoing expenses, not just the headline price.
Real-world impact: A regional construction firm in NSW recently used EAC to choose between two excavators. Factoring in new 2025 depreciation rates, the EAC showed that the more expensive, longer-lasting model was actually cheaper per year than its budget rival—saving the business thousands over the asset’s life.
Tips for Using EAC Effectively
- Always Use the Latest Tax and Depreciation Rules: Check the 2025 ATO guidelines before running your numbers.
- Include All Costs: Don’t forget insurance, registration, and energy/fuel costs. The more complete your NPV, the more accurate your EAC.
- Choose a Realistic Discount Rate: For most businesses in 2025, a rate between 5–7% reflects current loan and investment returns.
- Review Annually: As tax policies and interest rates change, recalculate EAC for major asset classes to keep your investment strategy sharp.
Conclusion: Make EAC Your Go-To Decision Tool
Equivalent Annual Cost isn’t just a textbook formula—it’s the tool that turns complex investment decisions into clear choices. In Australia’s evolving 2025 financial environment, understanding EAC gives you the edge, ensuring every dollar you invest works harder for your business or household. Don’t settle for guesswork or false savings: let EAC guide your next big move.
