You have just landed an internship in the CFO's office of Hawkesworth Inc. Your first task is to estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

Sales revenues $13,000

Depreciation $4,000

Other operating costs $6,000

Tax rate 35.0%

a. $6,099

b. $6,251

c. $6,407

d. $6,568

e. $5,950

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