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Answer (A) is correct . The annual operating cash flows for a capital project consists of two components:? the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Dickens can be calculated as follows: Net annual operating revenue [$4,000 × ($500 – $450)] $200,000 ? Less:? income tax expense ($200,000 × 40%) (80,000) After-tax cash inflow from operations $120,000 The depreciation tax shield is derived as follows: Cost of new equipment ($180,000 + $12,000 + $18,000) $210,000 Divided by:? estimated useful life ÷??????????5 Annual depreciation expense $??42,000 Times:? tax rate ×?????40% Annual depreciation tax shield $??16,800 Dickins’s total incremental after-tax operating cash flows for each year of the project’s life is thus $136,800 ($120,000 + $16,800).

Answer (B) is incorrect because The amount of $136,000 results from subtracting salvage value when calculating depreciation expense.
Answer (C) is incorrect because The amount of $128,400 assumes depreciation is recognized over 10 years.
Answer (D) is incorrect because The amount of $107,400 assumes that depreciation is recognized over 10 years and that it requires a cash outlay.