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This is the after-tax operating cash flow from the project. In this problem, the after-tax cash flow from the project also includes the depreciation tax shield.
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This is the pre-tax operating cash flow. It needs to be converted to its after-tax equivalent by multiplying it by (1 ? the tax rate). In addition, the after-tax cash flow from the project includes the depreciation tax shield.
The depreciation in the first year will be ($250,000 + $25,000) × .20, which is $55,000. The depreciation tax shield will be $55,000 × .40 = $22,000. Operating cash flow after tax is pre-tax cash flow of $75,000 × (1 ? .40), which equals $45,000. The after-tax cash flow for the first year of the project would amount to $22,000 + $45,000 = $67,000.