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Answered: - General Phone Apps (GPA) is evaluating a proposal to internally


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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 prototype has been completed that evaluated the feasibility and

 

created a macro design of the proposed system (sunk costs).

 

The estimated data for the proposal is shown below:

 


 

Data Block

 

(Dollars in thousands of $)

 


 

1

 


 

2

 


 

3

 


 

Revenue without new software

 


 

$6,000

 


 

$6,400

 


 

$7000

 


 

Revenue With new software

 


 

$6,000

 


 

$8,000

 


 

$10,000

 


 

COGS %

 


 

30%

 


 

30%

 


 

30%

 


 

Marketing & Sales

 


 

$500

 


 

$750

 


 

$1,000

 


 

Cloud Service

 


 

$150

 


 

$200

 


 

$300

 


 

33.33%

 


 

44.45%

 


 

14.81%

 


 

20%

 


 

20%

 


 

20%

 


 

Development Costs

 


 

Depreciation %. 3 year MACRS

 

Tax rate

 


 

0

 

$1,000

 


 

The above costs are only for the proposal and will not be incurred if the

 

proposal is rejected. A three-year time horizon is to be used for the

 

evaluation, although the software is expected to be used much longer. Threeyear MACRS depreciation has been chosen for the projects 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.

 

Submit a spreadsheet containing an Income Statement that shows the

 

change in income resulting from this proposal. Use the standard Income

 


 

statement format that includes totals for COGS, SG&A, EBIT and Net

 

Earnings.

 


 

 


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