Sexton Industries is trying to decide between two different heating systems: The Gas heating system costs 645,000, has a three-year life, and makes annual pre- tax savings of 160,000. The equivalent annual cost (EAC) of the gas system has been calculated as being 85,612. The Electricity heating system has a six-year life, costs 430,000 and makes annual pre- tax savings of 90,000. The electricity heating system has a negative net present value (NPV) of 57,985. Both heating systems will be depreciated in full using the straight line method over their useful economic life. Both systems will have zero salvage value at the end of their life. You should assume that whichever heating system is chosen, it will need to be replaced when it wears out. The corporation tax rate for the company is 25 per cent. In making any calculations, you should assume that depreciation is tax deductible. The relevant discount rate is 10 per cent.

Required: i. Calculate the annual operating cash flow for the gas heating system. Explain your workings.

ii. Calculate the NPV of the gas heating system. Explain your workings

. iii. Calculate the EAC for the electric heating system and provide advice for the company as to which is the most cost effective machine. Explain your workings.

iv. Explain why Sexton Industries are using EAC rather than NPV to evaluate these investments in these circumstances.