In: Accounting
Differential Analysis Involving Opportunity Costs
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 $149,800 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 | $149,800 | |
Life of store equipment | 16 years | |
Estimated residual value of store equipment | $18,600 | |
Yearly costs to operate the warehouse, excluding depreciation of equipment | ||
depreciation of store equipment | $55,800 | |
Yearly expected revenues—years 1-8 | 74,300 | |
Yearly expected revenues—years 9-16 | 70,100 |
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?
$