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 $149,900 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 $149,900 Life of store equipment 16 years Estimated residual value of store equipment $18,000 Yearly costs to operate the warehouse, excluding depreciation of equipment $56,500 Yearly expected revenues—years 1-8 75,100 Yearly expected revenues—years 9-16 69,300 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". If required, use a minus sign to indicate a loss. Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 OperateWarehouse(Alternative 1) Invest inBonds(Alternative 2) DifferentialEffects(Alternative 2) Revenues $ $ $ Costs: Costs to operate warehouse Cost of equipment less residual value Profit (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 16 years?$

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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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 $149,900 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	$149,900
Life of store equipment	16 years
Estimated residual value of store equipment	$18,000
Yearly costs to operate the warehouse, excluding depreciation of equipment	$56,500
Yearly expected revenues—years 1-8	75,100
Yearly expected revenues—years 9-16	69,300

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". If required, use a minus sign to indicate a loss.

Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
	Operate Warehouse (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs:
Costs to operate warehouse
Cost of equipment less residual value
Profit (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 16 years?
$

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