Question

On July 1, Midway 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 $149,600 of 5% 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 store equipment		$149,600
Life of store equipment		16 years
Estimated residual value of store equipment		$18,000
Yearly costs to operate the warehouse, excluding depreciation of equipment
	depreciation of store equipment	$56,400
Yearly expected revenues—years 1-8		74,400
Yearly expected revenues—years 9-16		69,000

Required:

a. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

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)	$	$	$

b. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 16 years?
$

Answer 1

a.

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 (see below-note-1)	$1,147,200	$119,680	($1,027,520) [$119,680 - $1,147,200]
Costs:
Cost to operate warehouse ($56,400 ×16 years)	($902,400)	$0	$902,400
Cost of Equipment less Residual value ($149,600 - $18,000)	($131,600)	$0	$131,600
Income (Loss)	$113,200	$119,680	$6,480

Note-1)

Revenue under operate warehouse

Revenue = (74,400 × 8 years) + ($69,000 × 8 years)

Revenue = $595,200 + $552,000

Revenue = $1,147,200

Revenue under Invest in Bonds

Revenue = $149,600 ×5% × 16 years

Revenue = $119,680

b.

Total estimated income from operations of the warehouse for the 16 years

$113,200

Explanation:-

Particulars	Alternative 1
Revenue	$1,147,200
Costs:
Cost to operate warehouse ($56,400 × 16 years)	($902,400)
Cost of Equipment less Residual value ($149,600 - $18,000)	($131,600)
Total estimated income from operation of the warehouse for 16 years	$113,200