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Answer (C) is correct . The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components:? the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment (note that salvage value is not subtracted when calculating the depreciation tax shield). The first of these for Pelican can be calculated as follows: ? Net annual operating revenue ($450,000 – $300,000) $150,000 Less:? income tax expense ($150,000 × 40%) (60,000) After-tax cash inflow from operations $??90,000 The depreciation tax shield is derived as follows: Cost of new equipment ($180,000 + $10,000) $190,000 Divided by:? estimated useful life ÷??????????4 Annual depreciation expense $??47,500 Times:? tax rate ×?????40% Annual depreciation tax shield $??19,000 Pelican’s total incremental after-tax operating cash flows for each year of the project’s life is thus $109,000 ($90,000 + $19,000).

Answer (A) is incorrect because The amount of $90,000 results from neglecting the depreciation tax shield.
Answer (B) is incorrect because The amount of $106,000 results from improperly subtracting salvage value when calculating the depreciation tax shield.
Answer (D) is incorrect because The amount of $150,000 results from neglecting to account for the effect of income taxes on operating revenues and from neglecting to consider the depreciation tax shield.