Xml file not copying to test output directory

Try annotating your test with the DeploymentItem attribute: http://msdn.microsoft.com/en-us/library/microsoft.visualstudio.testtools.unittesting.deploymentitemattribute(v=VS.100).aspx

Here’s a code snippet from the documentation:

  [TestClass]
    public class UnitTest1
    {
        [TestMethod()]
        [DeploymentItem("testFile1.txt")]
        public void ConstructorTest()
        {
            // Create the file to deploy
            Car.CarInfo();
            string file = "testFile1.txt";
            // Check if the created file exists in the deployment directory
            Assert.IsTrue(File.Exists(file), "deployment failed: " + file +
                " did not get deployed");
        }
    }