Reference no: EM132772425
Problem - 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).
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 14 years?