To calculate the Year 1 cash flow, we can follow this step-by-step approach using the formula for after-tax cash flow (ATCF):

$\text{Cash Flow} = (\text{Sales Revenue} - \text{Operating Costs}) \times (1 - \text{Tax Rate}) + \text{Depreciation}$

Step 1: Calculate Earnings Before Tax (EBT)

$\text{EBT} = \text{Sales Revenue} - \text{Operating Costs} - \text{Depreciation}$ $\text{EBT} = 13,000 - 6,000 - 4,000 = 3,000$

Step 2: Calculate Taxes

$\text{Taxes} = \text{EBT} \times \text{Tax Rate}$ $\text{Taxes} = 3,000 \times 0.25 = 750$

Step 3: Calculate Net Income

$\text{Net Income} = \text{EBT} - \text{Taxes}$ $\text{Net Income} = 3,000 - 750 = 2,250$

Step 4: Add Back Depreciation (Non-cash expense)

Since depreciation is a non-cash expense, it must be added back to the net income to determine the cash flow: $\text{Cash Flow} = \text{Net Income} + \text{Depreciation}$ $\text{Cash Flow} = 2,250 + 4,000 = 6,250$

Answer:

The Year 1 cash flow is $6,250.

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Related Questions:

1. How is depreciation treated in cash flow calculations?
2. What are the different methods of calculating depreciation?
3. How does the tax rate affect cash flow?
4. What role do non-cash expenses play in financial analysis?
5. How would the cash flow change if the tax rate was different?

Tip: Always add back non-cash expenses like depreciation when calculating cash flow, as they don't affect actual cash.