Table 6.4
Mr.Lee is considering a capacity expansion for his supermarket.The annual sales projected for the next five years follow.The current capacity is equivalent to $300,000 sales.Assume a 20 percent pretax profit margin.

-Using the information in Table 6.4,if Lee expands the capacity to an equivalent of $360,000 sales now (year 0),how much would pretax cash flow in year 5 increase because of this expansion?
A)less than $7000
B)more than $7000 but less than $10,000
C)more than $10,000 but less than $13,000
D)more than $13,000

Question

Table 6.4
Mr.Lee is considering a capacity expansion for his supermarket.The annual sales projected for the next five years follow.The current capacity is equivalent to $300,000 sales.Assume a 20 percent pretax profit margin.
 
-Using the information in Table 6.4,if Lee expands the capacity to an equivalent of $360,000 sales now (year 0),how much would pretax cash flow in year 5 increase because of this expansion?
A)less than $7000 
B)more than $7000 but less than $10,000 
C)more than $10,000 but less than $13,000 
D)more than $13,000

Quizplus · Accepted Answer

The current annual sales are $300,000, and assuming a 20% pretax profit margin, the pretax cash flow is $60,000 ($300,000 x 0.2). 
If the capacity is expanded to an equivalent of $360,000 sales in year 0, the new pretax cash flow would be $72,000 ($360,000 x 0.2). 
Over the next 5 years, the total increase in pretax cash flow would be $60,000 ($72,000 - $60,000) each year, totaling $300,000 ($60,000 x 5) over the entire period. Therefore, the increase in pretax cash flow in year 5 alone would be more than $10,000 but less than $13,000, which is option C.

Table 6.4 Mr.Lee Is Considering a Capacity Expansion for His Supermarket.The Annual