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? $$\begin{array} { | c | c | }
\hline \text { Year } & \begin{array} { c }
\text { AnnualSales } \
\text { (in \$million) }
\end{array} \
\hline 1 & 100 \
2 & 140 \
3 & 170 \
4 & 200 \
5 & 250 \
\hline
\end{array}$$
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? $$\begin{array} { | c | c | } 
\hline \text { Year } & \begin{array} { c } 
\text { AnnualSales } \
\text { (in \$million) }
\end{array} \
\hline 1 & 100 \
2 & 140 \
3 & 170 \
4 & 200 \
5 & 250 \
\hline
\end{array}$$
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

The increase in total pretax cash flow is calculated by considering the additional sales due to expansion beyond the current capacity of $100 million. For years 2 to 5, the additional sales are $40 million, $70 million, $100 million, and $150 million respectively. The total additional sales over these years is $360 million. With a 25% pretax profit margin, the increase in pretax cash flow is $360 million * 0.25 = $90 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