Equivalent annual cost (EAC) approach

 

 

Explain a scenario in which the equivalent annual cost (EAC) approach would be a helpful approach to determining which project to choose. Additionally, please calculate the NPV for option A and option B. Which option would you use?

Sample Solution

Equivalent annual cost (EAC) is the annual cost of owning, operating, and maintaining an asset over its entire life. EAC is often used by firms for capital budgeting decisions, as it allows a company to compare the cost-effectiveness of various assets that have unequal lifespans. It is used to analyze two or more possible projects with different lifespans, where costs are the most relevant variable. The EAC calculation factors in a discount rate or the cost of capital. Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity and is used by companies internally to judge whether a capital project is worth the expenditure of resources.

ffeinated energy drinks (CEDs) are beverages that contain high levels of caffeine, stimulants, and often other substances such as taurine and sugars (NCCIH, 2018). High dose of sugar is used in these drinks in other to make it sweet and also sugar is considered a form of energy boost. Red Bull and Monster are one of the most popular energy drinks among children, adolescents and young adults (Breda, 2014). In advertisements, CEDs are said to increase the level of energy of an individual, focus and also keep them wide awake. This has led to the increase in the consumptions of these drinks. According to a study done in Ontario, about half of adolescents have had an energy at least once in the year. (NCCIH, 2018). Evidence have shown that energy drinks can lead to serious health impacts in children and teenagers. Also, studies have shown a rise in visits to emergency rooms due to energy drink overdose among adolescents (NCCIH, 2018). About a half of adolescents who consume energy drinks experienced unfavourable effects such as unsteadiness of the hands (Pound, 2017). A lot of health professionals have shown concerns over the adverse effects of CEDs most especially among children and adolescents. This is due to the high caffeine content which could lead to cardiovascular and neurological issues. Also, the high level of sugar could lead to obesity and even liver problems (Ibrahim, 2014). This is why some countries have banned energy drinks in the past or considered banning them.

According to studies, Health Canada implemented rules to be followed in a bid to regulate the consumption of caffeinated energy drinks such as limiting the amount of caffeine to “180mg per single serving” and “a concentration of 400mg/ L” (Canadian Paediatric Society, 2017). A ban was also placed on marketing of CEDs to children and adolescents. Mandatory labelling that goes in accordance with the Food and Drugs Act which includes the amount of caffeine from all sources, advisories on mixing beverage with alcohol, Nutrition Fact and ingredient lists among others (Canadian Paediatric Society, 2017).

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