ACCA Financial Management (F9) Certification Practice Exam

In determining the Equivalent Annual Benefit (EAB), what is its primary focus?

1. Revenue generation per year from an investment

2. Annual revenue discounted over the lifespan of a project

3. The present worth of future cash flows

4. The annual benefit of maintaining a project's cash flow

The correct answer is: Annual revenue discounted over the lifespan of a project

The primary focus of determining the Equivalent Annual Benefit (EAB) is to assess the annual revenue that can be generated from an investment, taking into account the time value of money. This process involves discounting the total revenue over the lifespan of the project to arrive at an annualized figure that reflects the value of those revenues in today’s terms. By using the EAB, decision-makers can compare different projects or investments that have various lifespans or cash flow patterns on a consistent annual basis. This helps to provide a clearer picture of the investment’s worth and assists in making informed financial decisions. The annual revenue figure calculated through discounting gives a more realistic view of the benefits derived from the project, as it factors in the diminishing value of future cash flows compared to immediate returns. The other options do not accurately capture the essence of the EAB; while they may relate to aspects of evaluating cash flows or revenues, they do not emphasize the annualized and discounted nature of the benefit as EAB does.