Innovative Inc.is experiencing a boom for the products it has introduced recently.The estimated annual sales projected for the next five years are given below.The current capacity is equivalent to only $100 million sales.The company is considering the alternative of expanding capacity to an equivalent of $250 million sales.Assume a 25 percent pretax profit margin.What is the increase in total pretax cash flow (summed over all years)that would be enjoyed because of the expansion?
$$\begin{array} { | c | c | }
\hline \text { Year } & \begin{array} { c }
\text { Annual Sales } \
\text { (in \$million) }
\end{array} \
\hline 1 & 100 \
2 & 140 \
3 & 170 \
4 & 200 \
5 & 250 \
\hline
\end{array}$$
A) less than or equal to 40 million
B) more than 40 million but less than or equal to 70 million
C) more than 70 million but less than or equal to 100 million
D) more than 100 million

Question

Innovative Inc.is experiencing a boom for the products it has introduced recently.The estimated annual sales projected for the next five years are given below.The current capacity is equivalent to only $100 million sales.The company is considering the alternative of expanding capacity to an equivalent of $250 million sales.Assume a 25 percent pretax profit margin.What is the increase in total pretax cash flow (summed over all years)that would be enjoyed because of the expansion?
$$\begin{array} { | c | c | } 
\hline \text { Year } & \begin{array} { c } 
\text { Annual Sales } \
\text { (in \$million) }
\end{array} \
\hline 1 & 100 \
2 & 140 \
3 & 170 \
4 & 200 \
5 & 250 \
\hline
\end{array}$$
A) less than or equal to 40 million
B) more than 40 million but less than or equal to 70 million
C) more than 70 million but less than or equal to 100 million
D) more than 100 million

Quizplus · Accepted Answer

First, let's calculate the total pretax cash flow over five years for the current capacity of $100 million sales:

Year 1: Pretax cash flow = $100 million x 0.25 = $25 million
Year 2: Pretax cash flow = $140 million x 0.25 = $35 million
Year 3: Pretax cash flow = $170 million x 0.25 = $42.5 million
Year 4: Pretax cash flow = $200 million x 0.25 = $50 million
Year 5: Pretax cash flow = $250 million x 0.25 = $62.5 million

Total pretax cash flow over five years = $25 million + $35 million + $42.5 million + $50 million + $62.5 million = $215 million

Now, let's calculate the total pretax cash flow over five years for the expanded capacity of $250 million sales:

Year 1: Pretax cash flow = $100 million x 0.25 = $25 million
Year 2: Pretax cash flow = $140 million x 0.25 = $35 million
Year 3: Pretax cash flow = $170 million x 0.25 = $42.5 million
Year 4: Pretax cash flow = $200 million x 0.25 = $50 million
Year 5: Pretax cash flow = $250 million x 0.25 = $62.5 million

Total pretax cash flow over five years for expanded capacity = $25 million + $35 million + $42.5 million + $50 million + $62.5 million = $215 million (same as current capacity)

Since the total pretax cash flow over five years is the same for both current and expanded capacity, the increase in total pretax cash flow due to the expansion is $0. Therefore, the correct answer is C) more than 70 million but less than or equal to 100 million.

Innovative Inc A) Less Than or Equal to 40 Million B) More

Innovative Inc A) Less Than or Equal to 40 Million
B) More