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 4.5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled: Equipment Categories Amount Cost of equipment $740,000 Life of equipment 14 years Estimated residual value of equipment $75,000 Annual costs to operate warehouse, less depreciation $175,000 Annual expected revenues of years 1-7 $280,000 Annual expected revenues of years 8-14 $240,000 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 income from operations of the warehouse for the 14 years?

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 4.5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled: Equipment Categories Amount Cost of equipment $740,000 Life of equipment 14 years Estimated residual value of equipment $75,000 Annual costs to operate warehouse, less depreciation $175,000 Annual expected revenues of years 1-7 $280,000 Annual expected revenues of years 8-14 $240,000 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 income from operations of the warehouse for the 14 years?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 15P

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On July 1, Coastal Distribution Company is considering leasing a building and buying the necessaryequipment 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 store equipment $740,000Life of store equipment 14 yearsEstimated residual value of store equipment $75,000Yearly costs to operate the warehouse, excludingdepreciation of store equipment $175,000Yearly expected revenues—years 1-7 $280,000Yearly expected revenues—years 8-14 $240,000Required:1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amountis zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minussign.
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On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues—years 1–6 $300,000 Yearly expected revenues—years 7–15 $400,000 Required: 1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0".
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Lambert Manufacturing has $100,000 to invest in either Project A or Project B. The following data are available on these projects (Ignore income taxes.): Project A Project B Cost of equipment needed now $ 100,000 $ 60,000 Working capital investment needed now $ 0 $ 40,000 Annual cash operating inflows $ 40,000 $ 35,000 Salvage value of equipment in 6 years $ 10,000 $ 0 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Both projects will have a useful life of 6 years and the total cost approach to net present value analysis. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%. The net present value of Project A is:

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Equipment Categories	Amount
Cost of equipment	$740,000
Life of equipment	14 years
Estimated residual value of equipment	$75,000
Annual costs to operate warehouse, less depreciation	$175,000
Annual expected revenues of years 1-7	$280,000
Annual expected revenues of years 8-14	$240,000