General Phone Apps (GPA) is evaluating a proposal to internally develop a softwa
ID: 2627888 • 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
$150,000
$165,000
$181,500
33.33%
44.45%
14.81%
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.
0 1 2 3 Development Costs $1,000,000 Revenue without new software $3,000,000 $3,200,000 $3,500,000 Revenue with 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 MACRS33.33%
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
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.