Uniform Annual Cost

NPV does not require that the total lives (or multiples thereof) of projects be equal for a comparison to be made. Thus, ambiguous and sometimes contradictory results can arise in using IRR versus NPV [Brigham (1982), Woinsky (1996)]. Jelen and Black (1983) have suggested a comparison based on uniform annual cost, called unacost. 

FIFO First in, first out (inventory) lb UAC Uniform annual cost ... 

Net Present Worth Method The NPW method allows the conversion of all money flows to be discounted to the present time. Appropriate interest factors are applied depending on how and when the cash flow enters a venture. They may be instantaneous, as in the purchase of capital equipment, or uniform, as in operating expenses. The alternative with the more positive NPW is the one to be preferred. In some instances, the alternatives may have different lives so the cost analysis must be for the least common multiple number of years. For example, if alternative A has a 2-year life and alternative B has a 3-year hfe, then 6 years is the least common multiple. The rate of return, capitalized cost, cash flow, and uniform annual cost methods avoid this complication. 

Uniform Annual Cost (UAC) Method In the uniform annual cost method, the cost is determined over the entire estimated project hfe. The least common multiple does not have to be calculated, as in the NPW method. This is the advantage of the UAC method however, the result obtained by this method is more meaningful than the results obtained by other methods. 

Under this scenario, the most economical control device is the ESP, as its EUAR is the largest (i.e., least negative) of the three. (Put another way, it has the lowest equivalent uniform annual cost.)... 

Table 27.9, a table of capital recovery factors, enables us to calculate the equivalent uniform annual cost (EUAC). The 120,000 figure is our base (No. 1 in Table 27.9). In conventional accounting, this would likely determine the capital charge the department manager would see on the income statement if the company used straight-line depreciation. It represents only depreciation of the asset. Using a 15 percent cost of capital...

Compare the true equivalent uniform annual cost for these two machines and indicate which one you would choose. 

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