Mary sat at her desk sipping her freshly brewed Tim Hortons$$ coffee, reviewing the income statement and balance sheet that her accountant just emailed her. A very good first year, with Net Income After$-$Taxes of $$297,540.$ Not bad for a start$-$up maker of $$stuff$.$ As she took another sip of her Timmies$$ she contemplated her hand made notes from the meeting with her accountant. Scribbled in her hand were the following goals for the upcoming year at You Grow:

$$ Increase sales by $50\%$

o Increasing sales by $50\%$ would require the purchase of $$1,000,000$ in new $$stuff$$ making machines.

$$ Given the rise in inflation and fuel prices cost of goods sold will rise from $50\%$ of sales to $60\%$ of sales in the upcoming year.

$$ Growth will require that You Grow maintain a cash$-$on$-$hand balance equal to $75$ days operating expenses.

$$ Inventory$-$on$-$hand will need to rise to $60$ days.

$$ The bank just confirmed that interest rates on You Grow$$s line of credit, and long$-$term loans, will rise from $10\%$ to $12\%$ per annum.

$$ The accountant also confirmed income taxes will rise from $25\%$ of net income to $27\%$ of net income.

$$ The dividend income from the business is my sole source of income, that has to stay at $75\%$ of Net Income if I$$m going to pay my bills and mortgage.

$$ Suppliers are very upset that we take too long to pay our bills. We$$ll need to get those payments in line with industry standards.

o I collected the following information regarding the $$stuff$$ making industry:

Industry Ratio Averages

Current Ratio $2\mathrm{.}25$

Acid Test $2\mathrm{.}00$

Age Accounts Receivable $80$

Age Inventory $90$

Age Accounts Payable $100$

Debt$-$to$-$Equity $60\%$

Total Asset Turnover $0\mathrm{.}70$

Return on Equity $20\%$

Mary$$s intuition was that the upcoming year would be very challenging both financially and operationally. In preparation for a meeting with your team she has set out the following questions:

$1.$ Can we achieve this growth?

$2.$ Do I need additional financing to fund all of this growth?

$3.$ ACME has offered a lease package to finance the new $$stuff$$ making machines. Is this a viable option? It looks very expensive compared to Big Bank financing?!

a$.$ Is there a difference in projected Year Two financial results if we lease versus buy the $$stuff$$ making machines?

$4.$ I don$$t like all of the debt that my company has incurred. Can I pay down some of this debt and still grow the business?

Comparison of Purchase of $$Stuff$$ Making Equipment vs Lease of $$Stuff$$ Making Equipment

Buy $$Stuff$$ Making Equipment Lease $$Stuff$$ Making Equipment

Big Bank ACME

Cost $$1,000,000($purchase cost$)$ $$250,000$ per annum

$($payments due beginning of the year$)$

Salvage Value $$25,000$

Loan $($Lease$)$ Term $5$ years $5$ years

Useful Life $5$ years $5$ years

Interest Rate on Loan $12\%$

$($Annual Interest Only Payment$)$

Maintenance Costs $$100,000$ per annum $$40,000$ per annum

Tax Depreciation Rates $($MACRS$)$

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

$20\mathrm{.}00\%33\mathrm{.}33\%19\mathrm{.}00\%12\mathrm{.}00\%11\mathrm{.}00\%$

Immediately following your team$$s meeting with Mary you and the team review your notes. You want to answer all of Mary$$s questions and concerns. Company standards require that you provide Mary with the following supporting documentation with your written recommendations:

$1.$ Projected Income Statement

$2.$ Projected Balance Sheet

$3.$ Projected Statement of Cash Flows

$4.$ An analytical comparison of the lease and buy options given the information provided by Mary.

$5.$ A one$-$two page summary of your analysis and recommendations to Mary.

Year $1$ Financial Statements