1. 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 $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