Answer:
Cash flow in year 1 = $5,950
Explanation:
Cash flow represent out of pocket expenditures and income that arise as a direct consequence of undertaking an investment decision.
Kindly note that some accounting expenses like depreciation and provisions and other apportionment of unavoidable cost are not qualified as cash flow.
Therefore, we would ignore the depreciation of $40,00 given in this question.
Cash flow = Revenue - operating cost - tax on cash profit + tax saving from depreciation
Cash profit = 13,000 - 6,000 = $7,000
Tax payment on cash profit = 35% × 7,000 = 2,450
Tax savings from depreciation = 35% × 4,000 = 1,400.00
Note that depreciation reduces the profit to be subject to tax, hence the tax liability is reduced by the amount of tax rate multiplied by the amount of the depreciation
Cash flow before = 13,000 - 6,000 - 2,450 + 1,400
Cash flow in year 1 = $5,950
