Choice "C" is correct. Generally, no gain or loss is recognized on the trade-in of an old asset for tax purposes; hence, there is no tax effect. The traded-in asset's book value becomes a portion of the depreciable basis of the new asset, resulting in additional depreciation for tax purposes in later years and the reduction of taxes payable in those later years. Therefore, the cash outflows in later years will decline.Choice "a" is incorrect. If an asset is abandoned, the net salvage value is treated as a reduction of the initial investment in the new asset. The abandoned asset's book value is considered a sunk cost, and therefore not relevant to the decision-making process. The remaining book value (for tax purposes) is deductible as a tax loss, which reduces the liability in the year of abandonment. This tax liability is considered a reduction of the new asset's initial investment in capital budgeting.Choice "d" is incorrect. Financial models used for capital decisions focus the financial manager on the cash flows associated with the investment and the comparison of those cash flows to expected rates and amounts of return. Because income taxes are a significant cash flow, they are considered in capital investment decisions, so the cash flows used are after-tax cash flows, not pretax cash flows.Choice "b" is incorrect. The amount of income tax paid on a gain on a sale is treated as a reduction of the sales price (which increases the initial expenditure). Conversely, a reduction in tax resulting from a loss on sale is treated as a reduction of the new investment.