General Phone Apps (GPA) is evaluating a proposal to internally develop a softwa
ID: 1091500 • 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. Note that the evaluation of the proposal is based on the difference that the proposal will make, since the goal is to evaluate the proposal. A similar situation is in discussion questions 8-8a and 8-8b. 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. No recommended decision is expected in this assignment as this requires a proposal cash flow statement that is next weeks topic.
Explanation / Answer
Data Block
Development Costs
$1,000,000
Sales annual % Increase W/O
10%
1
2
3
Revenue without
$2,500,000
$2,750,000
$3,025,000
$3,327,500
Sales annual % Increase With
33.33%
Revenue With
$2,500,000
$3,333,250
$4,444,222
$5,925,481
COGS %
50%
Marketing Expense
$75,000
$75,000
$75,000
Cloud Service annual change
10%
Cloud Service
$150,000
$165,000
$181,500
Depreciation %. 3 year MACRS
33.33%
44.45%
14.81%
Depreciation
$333,300
$444,500
$148,100
Book Value
$666,700
$222,200
$74,100
Tax rate
20%
MARR
15%
Sales of Servers
$50,000
Salvage Value
$300,000
AR annual decrease
15%
Account Receivable
$250,000
$212,500
$180,625
$153,531
Accounts Payable
($150,000)
($200,000)
($200,000)
($200,000)
Total Working Capital
$100,000
$12,500
($19,375)
($46,469)
Change in Working Capital
($87,500)
($31,875)
($27,094)
Year
0
1
2
3
Revenue Increase
$583,250
$1,419,222
$2,597,981
COGS
($291,625)
($709,611)
($1,298,991)
Gross Margin
$291,625
$709,611
$1,298,991
SG & A
Marketing Expense
($75,000)
($75,000)
($75,000)
Cloud Service
($150,000)
($165,000)
($181,500)
Depreciation
($333,300)
($444,500)
($148,100)
Total S.G.&A.
($558,300)
($684,500)
($404,600)
EBIT
($266,675)
$25,111
$894,391
Taxes
$53,335
($5,022)
($178,878)
Net Earnings
($213,340)
$20,089
$715,513
Cash Flow Statement
0
1
2
3
Net Earnings
($213,340)
$20,089
$715,513
Depreciation
$333,300
$444,500
$148,100
Investment
($1,000,000)
Salvage
$50,000
$300,000
Tax on gains
($10,000)
($45,180)
Change in W.C.
$87,500
$31,875
$27,094
Cash Flow
($1,000,000)
$247,460
$496,464
$1,145,526
PW
AW
IRR
$343,783
$150,568.95
30.31%
Data Block
Development Costs
$1,000,000
Sales annual % Increase W/O
10%
1
2
3
Revenue without
$2,500,000
$2,750,000
$3,025,000
$3,327,500
Sales annual % Increase With
33.33%
Revenue With
$2,500,000
$3,333,250
$4,444,222
$5,925,481
COGS %
50%
Marketing Expense
$75,000
$75,000
$75,000
Cloud Service annual change
10%
Cloud Service
$150,000
$165,000
$181,500
Depreciation %. 3 year MACRS
33.33%
44.45%
14.81%
Depreciation
$333,300
$444,500
$148,100
Book Value
$666,700
$222,200
$74,100
Tax rate
20%
MARR
15%
Sales of Servers
$50,000
Salvage Value
$300,000
AR annual decrease
15%
Account Receivable
$250,000
$212,500
$180,625
$153,531
Accounts Payable
($150,000)
($200,000)
($200,000)
($200,000)
Total Working Capital
$100,000
$12,500
($19,375)
($46,469)
Change in Working Capital
($87,500)
($31,875)
($27,094)
Year
0
1
2
3
Revenue Increase
$583,250
$1,419,222
$2,597,981
COGS
($291,625)
($709,611)
($1,298,991)
Gross Margin
$291,625
$709,611
$1,298,991
SG & A
Marketing Expense
($75,000)
($75,000)
($75,000)
Cloud Service
($150,000)
($165,000)
($181,500)
Depreciation
($333,300)
($444,500)
($148,100)
Total S.G.&A.
($558,300)
($684,500)
($404,600)
EBIT
($266,675)
$25,111
$894,391
Taxes
$53,335
($5,022)
($178,878)
Net Earnings
($213,340)
$20,089
$715,513
Cash Flow Statement
0
1
2
3
Net Earnings
($213,340)
$20,089
$715,513
Depreciation
$333,300
$444,500
$148,100
Investment
($1,000,000)
Salvage
$50,000
$300,000
Tax on gains
($10,000)
($45,180)
Change in W.C.
$87,500
$31,875
$27,094
Cash Flow
($1,000,000)
$247,460
$496,464
$1,145,526
PW
AW
IRR
$343,783
$150,568.95
30.31%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.