Mesko Corporation has provided the following information concerning a capital budgeting project: The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:

A) $12,000
B) $18,000
C) $6,000
D) $24,000

To calculate the income tax expense in year 2, we need to first calculate the taxable income in year 2.

To do this, we start with the annual cash inflows from the project, which are:

Year 1: $20,000
Year 2: $40,000
Year 3: $30,000
Year 4: $25,000
Year 5: $20,000

We then subtract the annual operating expenses and the annual depreciation expense:

Year 1: $10,000
Year 2: $12,000
Year 3: $14,000
Year 4: $16,000
Year 5: $18,000

Depreciation expense is calculated as follows:
Initial investment: $100,000
Residual value: $0
Useful life: 5 years

Depreciation expense = (Initial investment - Residual value) / Useful life
Depreciation expense = ($100,000 - $0) / 5
Depreciation expense = $20,000 per year

So, the taxable income in year 2 is:

Annual cash inflows - Annual operating expenses - Depreciation expense
$40,000 - $12,000 - $20,000 = $8,000

Next, we calculate the income tax expense using the company's tax rate of 30%:

Income tax expense = Taxable income * Tax rate
Income tax expense = $8,000 * 0.3 = $2,400

Finally, we need to account for the fact that the annual tax savings from depreciation will reduce the company's tax liability in year 2. The tax savings from depreciation in year 2 are calculated as:

Depreciation expense * Tax rate
$20,000 * 0.3 = $6,000

So, the income tax expense in year 2 is:

Income tax expense - Tax savings from depreciation
$2,400 - $6,000 = -$3,600

However, because the tax savings from depreciation is greater than the income tax expense, the company will actually receive a tax refund in year 2. This is because the tax savings from depreciation reduces the company's taxable income, which in turn reduces its tax liability.

To summarize:
Taxable income in year 2 = $8,000
Income tax expense in year 2 = $2,400
Tax savings from depreciation in year 2 = $6,000
Income tax expense in year 2 (after accounting for tax savings from depreciation) = $2,400 - $6,000 = -$3,600

Therefore, the answer is B) $18,000.