Part 1: The Performance Lawn Equipment database contains data needed to develop a pro forma income statement. Dealers selling PLE products all receive 18 percent of sales revenue for their part of doing business, and this is accounted for as the selling expense. The tax rate is 50 percent. Develop an Excel worksheet to extract and summarize the data needed to develop the income statement for 2014, and implement an Excel model in the form of a pro forma income statement for the company.
Part 2: The CFO of Performance Lawn Equipment, J. Kenneth Valentine, would like to have a model to predict the net income for the next three years. To do this, you need to determine how the variables in the pro forma income statement will likely change in the future. Using the calculations and worksheet that you developed along with other historical data in the database, estimate the annual rate of change in sales revenue, the cost of goods sold, the operating expense, and the interest expense. Use these rates to modify the pro forma income statement to predict the net income over the next three years.
Because the estimates you derived from the historical data may not hold in the future, conduct appropriate “what-if” scenarios and/or parametric sensitivity analyses to investigate how the projections might change if these assumptions don’t hold. In your model, construct a tornado chart to show how the assumptions impact the net income . Summarize your results and conclusions in a report to Mr. Valentine.