Question

XYZ Corporation is seeking an investment from the BSAD 200-1 Investment Team to expand operations and provided the attached financial statements during due diligence. XYZ is projecting a 10% growth rate in sales over each of the next five years and a 15% growth rate in payroll due to rising wage pressure from low unemployment conditions. The Cost of Goods Sold will increase at 10% annually due to rising pressure on commodity pricing and rent is forecast to grow by 8% for each of the next five years as well. Your job as our Investment Analyst is to create a pro-forma Income Statement for each of the next five years and decide whether to invest in XYZ Corporation, citing reasons why or why not. What trends are you seeing and to what factor(s) would you attribute these trends?

XYZ Corp Income Statement 10% 2021 2022 2023 2024 Growth Rate 2020 20,000 Sales 15% 10% F Payroll COGS Rent Total Expenses 8% (100,000) (40,000) (40,000) (180,000) - Net Profit - - - - Profit Margin

Answer 1

Income statement	Growth rate	2020	2021	2022	2023	2024
Sales	10%	200,000	220000	242000	266200	292820
			200000(1+0.1)	220000(1+0.1)	242000(1+0.1)	266200(1+0.1)
Payroll	15%	(100,000)	(115,000)	(132,250)	(152,088)	(174,901)
			-100000(1+0.15)	-115000(1+0.15)	-132250(1+0.15)	-152087.5(1+0.15)
COGS	10%	(40,000)	(44,000)	(48,400)	(53,240)	(58,564)
			-40000(1+0.1)	-44000(1+0.1)	-48400(1+0.1)	-53240(1+0.1)
Rent	8%	(40,000)	(43,200)	(46,656)	(50,388)	(54,420)
			-40000(1+0.08)	-43200(1+0.08)	-46656(1+0.08)	-50388.48(1+0.08)
Total Expenses		(180,000)	(202,200)	(227,306)	(255,716)	(287,884)
Net Profit		20,000	17,800	14,694	10,484	4,936
Profit Margin		10.00%	8.09%	6.07%	3.94%	1.69%
Since, Net profit margin is expected to decrease over the time, hence XYZ Corporation should not invest in this project.