The correct answer is option C and this is because the word "We" is the subject of the sentence and stays above and connects the verb and object of the sentence "take the ferry".
How to explain
The correct diagram of the sentence "We decided to take the ferry to the island" is as follows:
S
|
VP
|
V PP
|
| \
decided to take PP
| \
| \
ferry to the island
|
|
O
Key:
S: Sentence
VP: Verb Phrase
V: Verb
PP: Prepositional Phrase
O: Object
The sentence is in the declarative mood and has the following structure:
Subject: We
Verb: decided
Object: None
The prepositional phrase "to the island" modifies the verb "take" and indicates the destination of the ferry ride.