Capital Budgeting Problem: You are a recycler of spent plutonium rods from nuclear reactors, and a new government mandate requires you to purchase a filtration system for your wastewater. You can choose between two filtration systems.

Filtration System 1 has a four-year life and costs 600,000. It has an annual pre-tax operating cost of $50,000 in the first year. The filtration system will become less efficient with the passage of time. As a result, operating costs are expected to increase 5% per year over the Filtration Systems life.

Filtration System 2 has a six-year life and costs $360,000. It has an annual pre-tax operating cost of $40,000 in the first year. The operating efficiency of this filtration system will deteriorate faster than Filtration System 1. As a result, operating costs are expected to increase 8% per year over the Filtration Systems life.

You do not foresee any further changes in environmental laws or changes in water filtration technology. Both Filtration Systems have zero salvage values. The CCA rate for Filtration Systems is 50%, the corporate tax rate is 40% and the appropriate discount rate (RRR) is 11%.

c. What is Filtration System 1's EAC?

d. What is Filtration System 2's EAC?

e. Which Filtration System should you buy?

f. Do you need your results from c. and d. in order to answer question e?