Financial Terms equivalent annual cost

# Definition of equivalent annual cost

## equivalent annual cost

The cost per period with the same present value as the cost of buying and operating a machine.

## Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

# Related Terms:

## Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

## Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

## Agency costs

The incremental costs of having an agent make decisions for a principal.

## All-in cost

Total costs, explicit and implicit.

## Annual fund operating expenses

For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

## Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.

## Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).

## Annual report

Yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all
shareholders. A more detailed version is called a 10-K.

## Annualized gain

If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve
month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.

## Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

## Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

## Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

## Bond equivalent yield

Bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.

## Bond-equivalent basis

The method used for computing the bond-equivalent yield.

## Bond-equivalent yield

The annualized yield to maturity computed by doubling the semiannual yield.

## Carring costs

costs that increase with increases in the level of investment in current assets.

## Cash and equivalents

The value of assets that can be converted into cash immediately, as reported by a
company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's
Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

## Cash equivalent

A short-term security that is sufficiently liquid that it may be considered the financial
equivalent of cash.

## Cash-equivalent items

Temporary investments of currently excess cash in short-term, high-quality
investment media such as treasury bills and Banker's Acceptances.

## Certainty equivalent

An amount that would be accepted in lieu of a chance at a possible higher, but
uncertain, amount.

## Common stock equivalent

A convertible security that is traded like an equity issue because the optioned

## Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.

## Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.

## Cost of capital

The required return for a capital budgeting project.

## Cost of carry

Related: Net financing cost

## Cost of funds

Interest rate associated with borrowing money.

## Cost of lease financing

A lease's internal rate of return.

## Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

## Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

## Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.

## Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

## Effective annual yield

annualized interest rate on a security computed using compound interest techniques.

## Equivalent annual annuity

The equivalent amount per year for some number of years that has a present
value equal to a given amount.

## Equivalent annual benefit

The equivalent annual annuity for the net present value of an investment project.

## Equivalent annual cash flow

Annuity with the same net present value as the company's proposed investment.

## Equivalent bond yield

annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.

## Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

## Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.

## Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.

## Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).

## Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.

## Fixed-income equivalent

Also called a busted convertible, a convertible security that is trading like a straight
security because the optioned common stock is trading low.

## Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.

## Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

## Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

## Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

## Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.

## Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.

## Nominal annual rate

An effective rate per period multiplied by the number of periods in a year.

## Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.

## Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

## Price impact costs

Related: market impact costs

## Replacement cost

cost to replace a firm's assets.

## Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.

## Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.

## Shortage cost

costs that fall with increases in the level of investment in current assets.

## Stated annual interest rate

The interest rate expressed as a per annum percentage, by which interest
payment is determined.

## Sunk costs

costs that have been incurred and cannot be reversed.

costs of buying and selling marketable securities and borrowing. Trading costs include

## Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.

## True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

## Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

## Weighted average cost of capital

Expected return on a portfolio of all the firm's securities. Used as a hurdle
rate for capital investment.

## CASH AND CASH EQUIVALENTS

The balance in a companyâ€™s checking account(s) plus short-term or temporary investments (sometimes called â€śmarketable securitiesâ€ť), which are highly liquid.

## Cost basis

An assetâ€™s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.

## Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

## MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).

## Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.

## Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

## Annual Report

The report required by the Stock Exchange for all listed companies, containing the companyâ€™s financial statements.

## Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.

## Cash cost

The amount of cash expended.

## Cost

A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
typically in monetary terms.

## Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.

## Cost centre

A division or unit of an organization that is responsible for controlling costs.

## Cost control

The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.

## Cost driver

The most significant cause of the cost of an activity, a measure of the demand for an activity
by each product/service enabling the cost of activities to be assigned from cost pools to products/services.

## Cost object

Anything for which a measurement of cost is required â€“ inputs, processes, outputs or responsibility centres.

## Cost of capital

The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
cost of equity and debt weighted by the mix of equity and debt.

## Cost of goods sold

See cost of sales.

## Cost of manufacture

The cost of goods manufactured for subsequent sale.

## Cost of quality

The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.

## Cost of sales

The manufacture or purchase price of goods sold in a period or the cost of providing a service.

## Cost-plus pricing

A method of pricing in which a mark-up is added to the total product/service cost.

## Cost pool

The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.

## Costâ€“volumeâ€“profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

## Direct costs

costs that are readily traceable to particular products or services.

## Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.

## Full cost

The cost of a product/service that includes an allocation of all the (production and

## Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services â€“ see overhead.

## Job costing

A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customerâ€™s specification or in a batch of identical product/services.

## Labour oncost

The non-salary or wage costs that follow from the payment of salaries or wages, e.g. National
Insurance and pension contributions.

## Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

## Marginal cost

The cost of producing one extra unit.

## Opportunity cost

The lost opportunity of not doing something, which may be financial or non-financial, e.g. time.

## Period costs

The costs that relate to a period of time.

## Prime cost

The total of all direct costs.

## Process costing

A method of costing for continuous manufacture in which costs for an accounting compared are compared with production for the same period to determine a cost per unit produced.