Differential Analysis Involving Opportunity Costs

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 $150,500 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		$150,500
Life of store equipment		16 years
Estimated residual value of store equipment		$17,300
Yearly costs to operate the warehouse, excluding depreciation of equipment		$56,800
Yearly expected revenuesyears 1-8		75,100
Yearly expected revenuesyears 9-16		69,600

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.

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? $

Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Operate Warehouse (Alternative 1) 1,157,600 Invest in Differential Bonds Effects (Alternative 2) (Alternative 2) Revenues Costs: Costs to operate warehouse 0 Cost of equipment less residual value 0 Profit (Loss)