1. 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 $740,000 of 5% U.S. Treasury bonds that mature in 14 years. The bonds could be

purchased at face value. The following data have been assembled:

Cost of equipment $760,000

Life of equipment 14 years

Estimated residual value of equipment $85,000

Yearly costs to operate the warehouse, excluding depreciation of equipment $175,000

Yearly expected revenuesyears 17 $280,000

Yearly expected revenuesyears 814 $240,000

Instructions

• Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2).
• Based on the results disclosed by the differential analysis, should the proposal be accepted?
• If the proposal is accepted, what is the total estimated operating income of the warehouse for the 14 years?