To sum up, the literature review shows that the EACF concept has wide applications in many different areas.
Section II explains the EACF concept with a representative example; Section III raises the issue of finite (unmatched) horizon; Section IV explains to how to restore the validity of the methodology by incorporating the concepts of incidental and incremental cash flows; Section V concludes.
This is the so-called equivalent annual cash flow (EACF) method.
Now, to find the EACF for each case, we use the following equation,
By setting N = 3 for project A and N = 6 for project B, and using r = 10%, we find the EACF for A is [C.sub.A] = $7.37, and for B it is [C.sub.B] = $6.24.
ISSUES IN APPLYING THE EACF METHOD TO FINITE HORIZON
As in many textbooks, the EACF method assumes infinite horizon as mentioned above (Brealey & Myers, 1996; Brealey, Myers, & Allen, 2011, 2014).
But if one hopes to apply the EACF method and answer the question--how much more valuable project X is than Y on an annual basis, one needs to develop the EACF framework further as in the next section.
The cells of solid and dash lines indicate the matching EACF for the two scenarios, respectively.
More specifically, to make the EACF method applicable to the finite (unmatched) horizon situations, one shall choose the longest horizon of all the projects because the cash flows beyond the horizon do not belong to them anymore.
The cell of solid line indicates the matching EACF for the difference between project X and Y.
Finally, it should be noted that the correctly implemented EACF methodology does not offer any advantage if the question is to select a better project among a few candidates Its advantages show up when one is in some real-world situation and facing questions more complicated than simply picking a better project.