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$149,900Life of store equipment16 yearsEstimated residual value of store equipment$18,000Yearly costs to operate the warehouse, excluding depreciation of equipment$56,500Yearly expected revenues—years 1-875,100Yearly expected revenues—years 9-1669,300Required: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 AnalysisOperate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)July 1 OperateWarehouse(Alternative 1)Invest inBonds(Alternative 2)DifferentialEffects(Alternative 2)Revenues$$$Costs:   Costs to operate warehouse   Cost of equipment less residual value   Profit (Loss)$$$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 operating income of the warehouse for 16 years?$

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Asked Dec 1, 2019
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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 $149,900
Life of store equipment 16 years
Estimated residual value of store equipment $18,000
Yearly costs to operate the warehouse, excluding depreciation of equipment $56,500
Yearly expected revenues—years 1-8 75,100
Yearly expected revenues—years 9-16 69,300

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
Warehouse
(Alternative 1)
Invest in
Bonds
(Alternative 2)
Differential
Effects
(Alternative 2)
Revenues $ $ $
Costs:      
Costs to operate warehouse      
Cost of equipment less residual value      
Profit (Loss) $ $ $

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 operating income of the warehouse for 16 years?
$

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Expert Answer

Step 1

In differential analysis, the differential revenue that could be gained or differential cost that could be incurred from various alternative options are computed.

Step 2

Working Note:

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Computation of Total Revenue Amount 75100 Particulars Year 1-8 No of Years 8 Total 600800 Year 9-16 69300 No of years 8 Total 554400 Total Revenue 1155200

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Step 3

Analysis...

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Differential Analysis Alternate Differential Effect Particulars 1 Alternate 2 Revenue -1011296 1155200 143904 Cost Cost to operate Warehouse -904000 0 904000 Cost of equipment less residual value -131900 0 131900 Income 119300 143904 24604

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