Because of a security vulnerability in EPS files, Office 2016, Office 2013, and Office 2010 have turned off the ability to insert EPS files into Office documents. This change is effective as of the April 11, 2017, security update.
All Windows-based versions of Office are affected. (This change had already been in place in Office 2007 since 2015.)
Office for Mac 2011 and Office 2016 for Mac are unaffected by this change.
It looks like a product bug, but it's intentional
If you attempt to insert an EPS file into an Office document, you'll only get an image placeholder with message that says the picture can't be displayed:
In the case of EPS files, this message means that Office has turned off the ability to insert EPS files, because we think the vulnerability to malicious attacks is too great.
Beginning with Office 2010, the vulnerability was addressed by automatically converting EPS files to a more secure metafile format (EMF) upon insertion into an Office document. Files containing these converted EMF files will continue to behave normally—the metafiles will be retained and remain visible in the document.
Why this change was made
This change was done in response to active security incidents involving files. EPS files allow embedded scripts, which makes them a means of malicious attack for anyone who inserts an EPS file or opens a document that has an EPS file in it. In spite of previous efforts to mitigate the problem in Office documents, the EPS format continues to be a source of malicious attacks. To completely eliminate the risk of EPS files containing malicious code, Office decided to entirely turn off the ability to insert them.
Can I still use EPS files in Office?
Although we strongly recommend against it, it's possible for you to turn on the ability to insert EPS files. Read KB article 2479871 for the instructions, which are complicated and which involve making changes to the Windows registry. It is important to be aware that making this change would increase your vulnerability to malicious code. We recommend that you no longer add EPS images to your Office documents.
If you perform the change to the registry, you will be able to insert EPS files on the application on which you have applied the registry change. EPS files will be saved as metafiles and visible in the saved document, even by people who haven't performed the registry change. Be aware that making this change to the registry makes you vulnerable to malicious attacks based on EPS files.