A IT manager is evaluating two proposals to reduce costs in serving customers. The costs are shown below with the benefits of each proposal being equal. One will be implemented in
house and the other in the “Cloud”. There is no salvage value nor working capital with either proposal. The depreciation is 3-year MACRS. Software and internal system development costs can be depreciated if the result is not a product to be sold. A five year time span is to be used to evaluate the proposals.
Consider both Development costs and Implementation costs as depreciable. (There may be situations where this is not true, but assume it is for this question – “only your tax accountant will know”).
Using a present worth criteria, which should be selected.
1 2 3 4 5
3- Year 33.33% 44.45% 14.81% 7.41%
5- year 20.00% 32.00% 19.20% 11.52% 11.52%
Data Block In- house Cloud
Development costs $100,000 $125,000 Up front
Implementation costs $25,000 $60,000 Up front
Maintenance costs $4,000 $3,000 annual
Storage costs $20,000 $10,000 annual
Depreciation MACRS Years 3 3 years
Tax Rate 25% annually