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Income Statement with Depreciation

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 new software is expected to both increase sales and decrease development costs. The sales for the present year (year 0) are $2.,000,000 and without this new software capability would likely grow 10% annually. The new software is forecast to enable a sales growth of 33.33% per year, instead of only 10%. The annual cost of fulfilling orders and customer support (COGS) is forecast at 50% of revenue and expected to continue at this level.

The change in Marketing and Sales expense related to this project would be an increase of $75,000 annually and unchanged over the projects time horizon. The annual cost of the cloud service will be $150,000 in year 1 and increase 10% annually after that.

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.

No recommended decision is expected in this assignment as this requires a proposal cash flow statement that is next week's topic.

Solution Summary

This represents an income statement and format for a communications firm outlining all revenues and costs.