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 in the following table.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?

Question

Quizplus · Accepted Answer

To calculate the increase in total pretax cash flow, we need to find the difference between the cash flows with the current capacity and with the expanded capacity.

First, let's calculate the pretax profit for each year with the current capacity:

Year 1: 0.25 x $100 million = $25 million 
Year 2: 0.25 x $120 million = $30 million 
Year 3: 0.25 x $140 million = $35 million 
Year 4: 0.25 x $160 million = $40 million 
Year 5: 0.25 x $180 million = $45 million

Total pretax cash flow over 5 years with current capacity: 
$25 million + $30 million + $35 million + $40 million + $45 million = $175 million

Now let's calculate the pretax profit for each year with the expanded capacity of $250 million:

Year 1: 0.25 x $250 million = $62.5 million 
Year 2: 0.25 x $300 million = $75 million 
Year 3: 0.25 x $360 million = $90 million 
Year 4: 0.25 x $420 million = $105 million 
Year 5: 0.25 x $480 million = $120 million

Total pretax cash flow over 5 years with expanded capacity: 
$62.5 million + $75 million + $90 million + $105 million + $120 million = $452.5 million

The increase in total pretax cash flow is: 
$452.5 million - $175 million = $277.5 million

Since the question asks for the increase in total pretax cash flow summed over all years, we choose option C which is more than $70 million but less than or equal to $100 million.