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?
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?
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 |
$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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