Cost of equipment Life of equipment Estimated residual value of equipment Yearly costs to operate the warehouse, excluding depreciation of equipment Yearly expected revenues-years 1-7 Yearly expected revenues-years 8-14 $740,000 14 years $75,000 $175,000 $280,000 $240,000
Differential analysis involving opportunity costs
On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternative the company could use the funds to invest in $740,000 of 5% U.S Treasury bonds that mature in 14years the bonds could be purchased at face value. The following data have been assembled:
Instructions
1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14yrs(Alternative 1) as compared with investing in U.S Treasury bonds
2.Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the praposal is accepted, what is the total estimated operating income of the warehouse for the 14years?
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