Question

COMPSYS is a start-up computer company. This year, the first year of operations, the company expects to reach a Sales Revenue of $750,000. The company expects its sales to grow at a rate of 15% per year. Its Cost of Goods Sold (COGS) is running at 34% of Sales Revenue, and is expected to remain at that rate. Its Selling Costs are 12% of Sales in the first year and are expected to increase by an additional 3% per year after that. Its General and Administrative Costs (including Research and Development) are $410,000 this year, and are scheduled to rise at 4% every year after that. Earnings Before Taxes (EBT) is Sales Revenue less Cost of Goods Sold, Selling Costs, and General and Administrative Costs. Taxes are 25% of Earnings Before Taxes, if the Earnings Before Taxes are greater than zero but less than or equal to $50,000. If earnings are greater than $50,000 per year, then the tax rate is 35%. Use IF statements for computing taxes.

a)        Design and implement a worksheet to make a 5-year income statement projection for COMPSYS starting from this year. First, plan the format and layout of your worksheet areas. You should have separate areas for documenting the spreadsheet, indicating areas of the worksheet, and identifying assumptions with well-labeled separate cells for each of the growth rates and proportional factors. You should have a separate row for each item in the income statement and a separate column for each year. The final row should be for Earnings After Taxes. Use the Fill operation wherever possible.

b)        Calculate the Net Present Value (NPV) of the Earnings After Taxes for the 5 years. Use a Discount Rate of 7%. Provide a label to indicate the results and place the value at the bottom of your worksheet.

c)         Format your spreadsheet in an attractive manner. The first sheet should contain a brief documentation of the software package that you develop. The second sheet should be the EXCEL model. Here, the assumptions (given in the initial paragraph) should be first stated followed by the actual spreadsheet. The third sheet should contain the graphs you generate.

Optional (the following sections: d and e are optional but will be awarded bonus points if completed correctly)

d)        The management feels that the estimate for the first year's Sales Revenue, Cost of Goods Sold, Selling Costs, and General and Administrative Expenses may not be as certain. Since these four items are critical to the success of the operations, the management would like you to perform a sensitivity analysis to see what would the NPV look like when these numbers fluctuate within a range of +/- 20% of the estimate. That is, provide estimates of costs and revenues for this range which should be 80, 85, 90, 95, 100, 105, 110, 115, and 120% of the standard estimates.

(Hint: When you are formulating for these four items, add a certainty factor to the formulas. The certainty factor should not be hardcoded in the formulas. Always keep the input assumptions in a separate area in your worksheet. Use the Create Data Table under Data to perform the sensitivity analysis.)

e)        Produce the following graphs to present to the management:

• Sales and total expenses over the five-year period. Mark where the business starts to make a profit;

• The impact of fluctuations of the initial estimates for the cost of goods sold percentage; sales revenue; and the general and administrative expenses on the NPV.

(Hint: The horizontal axis should be from 80% to 120% of the original estimates, whilst the vertical axis should be the NPV. Remember, the 100% point is your original estimates. The curves for sales, cost of goods sold and the general and administrative expenses should be in the same graph.)

Answer 1

COMPSYS
INCOME STATEMENT
YEAR	0	1	2	3	4	5
SALES	750000.00	862500.00	991875.00	1140656.25	1311754.69	1508517.89
Less:
COST OF GOODS SOLD	255000.00	293250.00	337237.50	387823.13	445996.59	512896.08
SELLING COST	90000.00	92700.00	95481.00	98345.43	101295.79	104334.67
GENERAL & ADMINISTRATIVE COST	410000.00	426400.00	443456.00	461194.24	479642.01	498827.69
EBT	-5000.00	50150.00	115700.50	193293.46	284820.29	392459.45
TAX	-1250.00	17552.50	40495.18	67652.71	99687.10	137360.81
NET INCOME	-3750.00	32597.50	75205.33	125640.75	185133.19	255098.64
DISCOUNT RATE (7%)		0.934	0.873	0.816	0.763	0.713
DICOUNTED CASH FLOW	-3750.00	30446.07	65654.25	102522.85	141256.62	181885.33
NPV = NET CASH INFLOW -NET CASH OUTFLOW
NPV =	518015.12
SALES GROWTH RATE 15%
COGS = 34% OF SALES
SELLING COST 3% GROWTH
GENERAL & ADMINISTRATIVE COST = 4% GROWTH
A NEGATIVE EBT REDUCES TAX AND THEREFORE FORMS A BENEFIT FOR THE ORGANISATION. THEREFORE, TAX IS DEDUCTED FROM SUCH A GAIN