9. This extended example illustrates what happens to the EAC when we consider taxes. You are evaluating two different pollution control options. A filtration system will cost $1.2 million to install and $50,000 annually, before taxes, to operate. It will have to be completely replaced every five years. A precipitation system will cost $1.8 million to install but only $12,000 per year to operate. The precipitation equipment has an effective operating life of eight years. Straight-line depreciation is used throughout, and neither system has any salvage value. Which option should we select if we use a 12 percent discount rate? The tax rate is 21 percent. Filtration System Precipitation System Aftertax operating cost Depreciation tax shield Operating cash flow Economic life Annuity factor (12%) Present value of operating cash flow Capital spending Total PV of costs