General Phone Apps (GPA) is evaluating a proposal to internally develop a softwa
ID: 1099380 • 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
Year 1 Year 2 Year 3 Sales (Revenue with software) 3000000 4000000 5000000 Cost of goods sold ( 30% of revenues) 900000 1200000 1500000 Marketing and sales 25000 50000 75000 Cloud service 150000 165000 181500 Selling, General & Administrative Expense (SG&A) = COGS+ Marketing and sales costs + Cloud service costs= 1075000 1415000 1756500 Depriciation = 333300 444500 148100 EBIT =Revenues - SG&A - Depriciation = 1591700 2140500 3095400 Net Earnings @25% tax rate 1193775 1605375 2321550
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