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Possible Misinterpretations of Equivalent Annual Incomes in Inflationary Times

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Abstract:

Equivalent annual incomes (EATs) are often computed to compare investments with similar size but different lives. One common form of EAT fails to readily illustrate that before-tax present values of new projects should not change with inflationary expectations, given the same real interest rate. This type of EAI also fails to reflect reduction in after-tax present value of new projects as expected inflation rises. An EAI formulation is suggested that eliminates these problems and assures correct project rankings regardless of the inflation rate. North. J. Appl. For. 4:210-211, December 1987.

Document Type: Journal Article

Affiliations: Virginia Polytechnic Institute and State University, Blacksburg, VA 24061

Publication date: 1987-12-01

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