st of equipment $149,200 Life of equipment 16 years Estimated residual value of equipment $27,200 Yearly costs to operate the warehouse, excluding     depreciation of equipment $55,600 Yearly expected revenues—years 1-8 84,700 Yearly expected revenues—years 9-16 74,000 Required: 1.  Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions. Five StarProposal to Operate Warehouse  Differential revenue from alternatives:       $Revenue from operating warehouse     Revenue from investment in bonds       $Differential revenue from operating warehouse Differential cost of alternatives:       $Costs to operate warehouse     Cost of equipment less residual value       Differential cost of operating warehouse     $Differential income from operating warehouse     Feedback   1. Follow Exhibit 2 and Exhibit 9 in the text. Subtract the warehouse operating costs (16 years) and the cost of the equipment less residual value from the revenues from operating the warehouse. Determine the bond investment interest income for 16 years (principal x rate x time). Determine the differential effect on the revenues, costs, and income (loss). 2.  Based on the results disclosed by the differential analysis, should the proposal be accepted?   3.  If the proposal is accepted, what is the to

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Differential Analysis Report Involving Opportunity Costs

Five Star 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 $149,200 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 $149,200
Life of equipment 16 years
Estimated residual value of equipment $27,200
Yearly costs to operate the warehouse, excluding  
  depreciation of equipment $55,600
Yearly expected revenues—years 1-8 84,700
Yearly expected revenues—years 9-16 74,000

Required:

1.  Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions.

Five StarProposal to Operate Warehouse 
Differential revenue from alternatives:    
 
$Revenue from operating warehouse  
 
Revenue from investment in bonds  
 
  $Differential revenue from operating warehouse
Differential cost of alternatives:    
 
$Costs to operate warehouse  
 
Cost of equipment less residual value  
 
  Differential cost of operating warehouse
 
  $Differential income from operating warehouse
 
 
Feedback
 

1. Follow Exhibit 2 and Exhibit 9 in the text. Subtract the warehouse operating costs (16 years) and the cost of the equipment less residual value from the revenues from operating the warehouse. Determine the bond investment interest income for 16 years (principal x rate x time). Determine the differential effect on the revenues, costs, and income (loss).

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 the 16 years?
$fill in the blank 02b4cbfc6065045_2

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