Info

Present value of operating cash flow

$ 126,888

$ 368,350

Capital spending

- 1,100,000

- 1,900,000

Total PV of costs

-$ 973,112

-$1,531,650

Notice that the operating cash flow is actually positive in both cases because of the large depreciation tax shields. This can occur whenever the operating cost is small relative to the purchase price.

To decide which system to purchase, we compute the EACs for both using the appropriate annuity factors:

Filtration system: -$973,112 = EAC x 3.6048 EAC = -$269,951

Precipitation system: -$1,531,650 = EAC x 4.9676

The filtration system is the cheaper of the two, so we select it. In this case, the longer life and smaller operating cost of the precipitation system are not sufficient to offset its higher initial cost.

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