FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Differential Analysis Involving Opportunity Costs
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 store equipment $740,000
Life of store equipment 14 years
Estimated residual value of store equipment $75,000
Yearly costs to operate the warehouse, excluding
depreciation of store equipment $175,000
Yearly expected revenues—years 1-7 $280,000
Yearly expected revenues—years 8-14 $240,000
Required:
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 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.
2. Based on the results disclosed by the differential analysis, should the proposal to operate the
warehouse 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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