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 $740,000 of 4.5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:Equipment CategoriesAmountCost of equipment$740,000Life of equipment14 yearsEstimated residual value of equipment$75,000Annual costs to operate warehouse, less depreciation$175,000Annual expected revenues of years 1-7$280,000Annual expected revenues of years 8-14$240,000 Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). Based on the results disclosed by the differential analysis, should the proposal be accepted? If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years?

Income statement is prepared by the business entities so as to know how much amount of gross profit…

Answered: On July 1, Coastal Distribution Company…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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 $740,000 of 4.5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:

Equipment Categories	Amount
Cost of equipment	$740,000
Life of equipment	14 years
Estimated residual value of equipment	$75,000
Annual costs to operate warehouse, less depreciation	$175,000
Annual expected revenues of years 1-7	$280,000
Annual expected revenues of years 8-14	$240,000

Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).
Based on the results disclosed by the differential analysis, should the proposal be accepted?
If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years?

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