B is corrent. The after-tax cash flows are calculated by taking the before-tax cash flows and deducting the income taxes. Since depreciation is deductible for tax purposes, income taxes for year two are $3,000 [($30,000 cash flows – $20,000 depreciation) × 30%]. Therefore, after-tax cash flows are equal to $27,000 ($30,000 cash flows before taxes – $3,000 taxes).
A is incorrect because the after-tax cash flow is $27,000.
A is incorrect because the after-tax cash flow is $27,000.
D is incorrect because the after-tax cash flow is $27,000.
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