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 $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 Life of store equipment $149,900 16 years $18,400 Estimated residual value of store equipment Yearly costs to operate the warehouse, excluding depreciation of equipment Yearly expected revenues-years 1-8 Yearly expected revenues-years 9-16 $56,800 75,700 70,900 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 Invest in Differential Warehouse Bonds Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Costs to operate warehouse Cost of equipment less residual value Profit (Loss) Feedback Check My Work 1. Subtract the warehouse costs (14 years) and the cost of the equipment less the residual value from the revenues from operating the warehouse. Determine the bond investment interest income for 10 Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 1 from alternative? Which Revenues Iternative 2) (Alternative 2) Costs: Costs to operate warehouse 0 000 Cost of equipment less residual value 8 Profit (Loss) Feedback Check My Work 1. Subtract the warehouse costs (14 years) and the cost of the equipment less the residual value from the revenues from operating the warehouse. Determine the bond investment interest income for 14 year Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 1 from alternative 2. Which alternative has the most desirable effect on income? 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? No 3. If the proposal is accepted, what is the total estimated operating income of the warehouse for 16 years? Feedback Check My Work 2. Subtract the warehouse costs (14 years) and the cost of the equipment less the residual value from the revenues from operating the warehouse. Determine the bond investment interest income for 14 years Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 1 from alternative 2. Which alternative has the most desirable effect on income? 3. Determine the differential profit from operating the warehouse as derived in part (1). Add it to the to the investment income forgone by electing to operate the warehouse. Feedback