Equivalent Annuity



There are many reasons why people will consider buying an annuity. Not only is it a good investment, but it can give you a stable income for many years if not the rest of your life. What exactly is the equivalent annuity method and how does it work? Yet another way to figure out what the best annuity for you to purchase to make the most money and be comfortable for your life.



With this method you take the present net value of the annuity and you figure out the annual cash flow you will get. To do this you will take that present value and divide it by what the present value is of that annuity factor. This method will normally only be used to asses those cost specific projects that you may be taking on and need to know exact cash flows. In using this method you will get what is known as an equivalent annual cost. That will be how much it cost each year to operate and run the assets over their full lifetime.

In order to compare those investment projects that may not have the same lifetime this will be the best method to use. As an example you can take project one that has a lifetime of say seven years. But on the other side you have project two that will last eleven years. The method stated above will allow you to replace these with an identical project in order to figure out the right amount you will earn each year.
There is also what is called the chain method that you may use in order to get the cash flow that you will earn each year. Two projects that have different lifetimes will be chained together to figure out your cash flow. Giving you an equivalent answer to just how much you can expect to earn on those different projects.

Of course you will also assume that those two projects will have the same cash flow, with no inflation factored into it. In this case a real interest rate is going to be used in the equation instead of a normal rate of interest.
With an annuity you will be getting a product that will offer you a tax shelter. A way that you will be able to earn money because those returns are going to be sheltered from taxes. Plus you will pay no tax when you go to withdraw money. Perhaps a better term to use about an annuity is tax deferred.