The product and marketing departments at ABC Corp are estimating a growth rate of 15 percent for next year.Consider the two distinct scenarios below:

1. Assume fixed assets increase proportionally to sales and will be depreciated at a similar rate to existing fixed assets.
2. Assume that, to increase production, ABC Corp must set up an entirely new location at a cost of $10,000,000. The new fixed assets will be depreciated at 10% a year.
3. Discuss the methodology used above. What would you likely change if you operated in an environment in which certain balance sheet items don't vary proportionally with sales?

Income Statement Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income II Dividends Add to RE $80,518,460 $58,672,892 -$10,210,200 -$3,608,440 $8,026,928 -$1,261,040 $6,765,888 $2,706,355 $4 059 533 $1,220,000 $2,839,533 Financials Balance Sheet Assets Current assets Cash $912,870 Accounts rec. $1,466,250 Inventory $2,146,360 Total CA $4,525,480 Fixed assets Net PP&E $35,446,860 Total Assets $39 972 340 Liabilities and Equity Current liabilities Accounts payable Notes payable Total CL Long-term debt Shareholder equity Common stock Retained earnings Total equity Total L&E Page 1 $1,858,010 $4,242,700 $6,100,710 $11,000,000 $800,000 $22,071,630 $22,871,630 $39 972 340 I#