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 $151,600 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		$151,600
Life of store equipment		16 years
Estimated residual value of store equipment		$17,000
Yearly costs to operate the warehouse, excluding depreciation of equipment
	depreciation of store equipment	$55,900
Yearly expected revenuesyears 1-8		74,000
Yearly expected revenuesyears 9-16		70,600

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". 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)	$	$	$

Feedback

Subtract the warehouse costs (16 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 16 years (principal rate time). Determine the differential

Learning Objective 1.

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? $