Question

On July 1, Matrix Stores Inc. 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 $151,600 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 store equipment $151,600

Life of store equipment 16 years

Estimated residual value of store equipment $17,400

Yearly costs to operate the warehouse, excluding depreciation of equipment depreciation of store equipment $56,500

Yearly expected revenues—years 1-8 74,600

Yearly expected revenues—years 9-16 70,400

Required: 1. 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) $ $ $

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

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

Answer 1

Ques 1
Proposal to Operate Warehouse
01-Jul-18
Differential revenue from alternatives:
Revenue from operating warehouse	1160000	(74600*8+70400*8)
Revenue from investment in bonds	145536	(151600*6%*16)
Differential revenue from operating warehouse		1014464
Differential cost of alternatives:
Costs to operate warehouse	904000	(56500*16)
Cost of equipment less residual value	134200	(151600-17400)
Differential cost of operating warehouse		1038200
Differential income from operating warehouse		-23736
Ques 2
reject the case	since differential income is negative
Ques 3
Total estimated revenue from operating warehouse		1160000
Total estimated expenses to operate warehouse:
Costs to operate warehouse, excluding depreciation	904000
Cost of equipment less residual value	134200	1038200
Total estimated income from operating warehouse		121800
Or you could also calculate It by
Investment income forgone	145536
Add:Income from operating warehouse	-23736
Total estimated income from operating warehouse	121800