General Phone Apps (GPA) is evaluating a proposal to internally develop a softwa
ID: 1099116 • Letter: G
Question
General Phone Apps (GPA) is evaluating a proposal to internally develop a software capability that is intended to enhance their application (app) development process by automating testing and simplifying product conversion among different operating systems. Since it will be cloud based, it also will facilitate group development projects and enable employees to more easily work from different locations. This is not a product to be sold, but rather it will assist internal development of their app software, so it is depreciable.
The development and conversion process is estimated to take one year in year 0, and cost $1,000,000. This investment includes all programming training, loading of existing products and testing the resulting conversion. An internal project over the past year has been completed that evaluated the feasibility and created a macro design of the proposed system (sunk costs).
The data that has been collected is shown below:
Data Block
0
1
2
3
Development Costs
$1,000,000
Revenue without new software
$3,000,000
$3,200,000
$3,500,000
Revenue With new software
$3,000,000
$4,000,000
$5,000,000
COGS %
30%
30%
30%
Marketing & Sales
$25,000
$50,000
$75,000
Cloud Service
$150,000
$165,000
$181,500
Depreciation %. 3 year MACRS
33.33%
44.45%
14.81%
Tax rate
25%
25%
25%
A three year time horizon is to be used for the evaluation, although the software is expected to be used much longer. The GPA tax rate is 25%.. Three-year MACRS depreciation has been chosen for the projects $1 million development and implementation cost.
Submit a spreadsheet containing an Income Statement for this proposal. Use the standard Income statement format that includes totals for COGS, SG&A, EBIT and Net Earnings.
Data Block
0
1
2
3
Development Costs
$1,000,000
Revenue without new software
$3,000,000
$3,200,000
$3,500,000
Revenue With new software
$3,000,000
$4,000,000
$5,000,000
COGS %
30%
30%
30%
Marketing & Sales
$25,000
$50,000
$75,000
Cloud Service
$150,000
$165,000
$181,500
Depreciation %. 3 year MACRS
33.33%
44.45%
14.81%
Tax rate
25%
25%
25%
Explanation / Answer
Period Starting: Year1 Year2 Year3 Sales Sales with new software 3,000,000 4,000,000 5,000,000 Other Total Sales 3,000,000 4,000,000 5,000,000 Less Cost of Goods Sold Total Cost of Goods Sold 900,000 1,200,000 1,500,000 Gross Profit 2,100,000 2,800,000 3,500,000 Gross Margin 70.00% 70.00% 70.00% Sales General, and Administrative Expenses Cloud Service 150,000 165,000 181,000 Marketing/promotion 25,000 50,000 75,000 Depreciation 333,300 444,500 148,100 Total Sales General, and Administrative Expenses 508,300 659,500 404,100 Earnings before Interest and Taxes 1,591,700 2,140,500 3,095,900 Income Taxes (397,925) (535,125) (773,975) Net Income (Loss) 1,193,775 1,605,375 2,321,925
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.