Question
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
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 $740,000 Life of equipment 14 years Estimated residual value of equipment $75,000 Yearly costs to operate the warehouse, $175,000 excluding depreciation of equipment Yearly excepted revenues- years 1-7 $280,000 Yearly excepted revenues-years 8-14 $240,000 1. 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 US Treasury bonds (Alternative 2). 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 income from operations of the warehouse for the 14 years?
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