Equivalent, incidental, and incremental cash flows

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The equivalent annuity cash flow (EACF) method is an interesting concept in asset pricing and corporate finance. It is normally believed that the EACF applies in cases where the cash flows of certain pattern repeat themselves perpetually. However, the authors of this study clarify that this is not a necessary condition of the equivalent annuity cash flow method. The method's simple appearance belies several subtleties that could easily invalidate the method without causing any alarm. This study explains how to apply this methodology to finite horizons, especially when the projects have different economic lives, and how the issues of incidental and incremental cash flows may arise and be correctly handled in the EACF framework. A search of the literature suggests that this is the first study to address these issues. Given the importance of the EA CF methodology to both theorists and practitioners, the authors make a marginal yet important contribution to the literature in clarifying the EACF concept and methodology.

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© 2015 International Academy of Business and Public Administration Disciplines. Publisher's version of record can be accessed here.

Publication Title

International Journal of Business, Accounting and Finance