If we calculate Net Present Value, then we would choose Investment B with an NPV of $ 27,404.27. But if we take into account that Investment A provides us with a payout and return sooner, then we would choose Investment B based on the EAA. Please note how EAA is calculated using the Excel PMT function:
The equivalent annual annuity formula is used to show the net present value of an investment as a series of equal cash flows for the length of the investment. Longer dated investments have a higher degree of risk since they take longer to pay back the investor. As such, it is important to take the length of the investment into consideration before making a final purchase decision. The equivalent annual annuity compares multiple investment opportunities with different terms to maturity by setting them all to one year. That is, the calculation translates return into an equivalent annual rate. In this way, all investments can be compared and assessed on equal terms.