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
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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 | ||
| $55,600 | ||
| Yearly expected revenues—years 1-8 | 84,700 | |
| Yearly expected revenues—years 9-16 | 74,000 |
Required:
1. Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions.
| Differential revenue from alternatives: | ||
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$Revenue from operating warehouse | |
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Revenue from investment in bonds | |
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$Differential revenue from operating warehouse | |
| Differential cost of alternatives: | ||
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$Costs to operate warehouse | |
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|
Cost of equipment less residual value | |
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|
Differential cost of operating warehouse | |
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|
$Differential income from operating warehouse |
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?
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