On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $151,300 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: 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 1-8 Yearly expected revenues-years 9-161 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Line Item Description Revenues Costs: $151,300 16 years $18,000 $56,300 75,300 69,000 Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Costs to operate warehouse Cost of equipment less residual value Profit (Loss) Operate Warehouse (Alternative 1) Invest in Bonds (Alternative 2) DID Differential Effects (Alternative 2) 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what is the total estimated operating income of the warehouse for 16 years?
On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $151,300 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: 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 1-8 Yearly expected revenues-years 9-161 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Line Item Description Revenues Costs: $151,300 16 years $18,000 $56,300 75,300 69,000 Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Costs to operate warehouse Cost of equipment less residual value Profit (Loss) Operate Warehouse (Alternative 1) Invest in Bonds (Alternative 2) DID Differential Effects (Alternative 2) 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what is the total estimated operating income of the warehouse for 16 years?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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. Alternatively, the company could use the
funds to invest in $151,300 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:
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 1-8
Yearly expected revenues-years 9-16
Required:
1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds
(Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.
Line Item Description
Revenues
Costs:
$151,300
16 years
$18,800
$56,300
75,300
69,000
Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2);
July 11
Costs to operate warehouse
Cost of equipment less residual value
Profit (Loss)
Operate Warehouse Invest in Bonds Differential Effects.
(Alternative 1) (Alternative 2) (Alternative 2)
2. Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the proposal is accepted, what is the total estimated operating income of the warehouse for 16 years?
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