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 5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled: Cost of equipment $740,000 Life of equipment 14 years Estimated residual value of equipment $75,000 Yearly costs to operate the warehouse, excluding depreciation of equipment $175,000 Yearly expected revenues—years 1-7 $280,000 Yearly expected revenues—years 8-14 $240,000 Required: 1. 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). If an amount is zero, enter zero "0". Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Operate Warehouse (Alternative 1) Invest in Bonds (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Costs to operate warehouse Cost of equipment less residual value Income (Loss) $ $ $ 2. Based on the results disclosed by the differential analysis, should the proposal to operate the warehouse be accepted? 3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years? $

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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ex1.

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 $740,000 of 5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of equipment	$740,000
Life of equipment	14 years
Estimated residual value of equipment	$75,000
Yearly costs to operate the warehouse, excluding
	depreciation of equipment	$175,000
Yearly expected revenues—years 1-7	$280,000
Yearly expected revenues—years 8-14	$240,000

Required:

1. 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). If an amount is zero, enter zero "0".

Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
	Operate Warehouse (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Costs to operate warehouse
Cost of equipment less residual value
Income (Loss)	$	$	$

2. Based on the results disclosed by the differential analysis, should the proposal to operate the warehouse be accepted?

3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 14 years?
$

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