What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?
A) It increases.
B) It decreases.
C) It is not affected.
D) It depends on whether or not the projects are mutually exclusive.

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) is calculated as the sum of annual cash flows discounted at the opportunity cost of capital. As the opportunity cost of capital decreases, the discount rate used to calculate the EAC decreases, which in turn decreases the numerator of the equation. Therefore, the EAC decreases as the opportunity cost of capital decreases.

What Happens to the Equivalent Annual Cost of a Project