On July 1 Midway istr buticn company s ccnsidcnna cas?na ? buldnq and bu n a the

Question

On July 1 Midway istr buticn company s ccnsidcnna cas?na ? buldnq and bu n a the nccossary cquipment to operatc?pub c warehouse. Alternati e , the company could use the funds to nvestin $ 148,700 c c% u s. Trcazury bonds that mature n 15 year. The bonds could be purchased at face value. The fcllewing data have been assembled: Cost of store equipmernt Lifa of store cqupmcnt Estimatod ros dual valua ot store aqupment Yearly costs to operate the warehouse, excludng 148,0 10 ycars depreciation of store equipment $57,000 75,500 09,800 Yearly cxpccd revcnues yar10 negative numbers use minus sign. Differential Analysts Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) July 1 1,156,800 X 142,52 1,014,048 X 1200 X 131700X HS2 X 891.2001 x 131.700 X 8,852 X Cust of equpment less resdual velue ncome (Lo 142 2. 0ased on the results disdosed by the dfferential anaysis, shoud the proposal to operate a retail store be accepted?

Explanation / Answer

Solution 1:

Solution 2:

As return from investment in bond is higher than proposal to operate retail store, therefore proposal to operate retail store should not be accepted.

Solution 3:

If proposal is accepted, total estimated income from operations of the warehouse for 16 years = $120,600

Differential Analysis Operate Warehouse (Alt 1) or Invest in Bonds (Alt2) Particulars Operate Warehouse (alt 1) Invest in Bonds (alt 2) Differential effect on income (Alt 2) Amount Amount Revenues $1,162,400.00 $142,752.00 -$1,019,648.00 Costs: Costs to operate warehouse $912,000.00 $0.00 -$912,000.00 Cost of equipment less residual value $129,800.00 $0.00 -$129,800.00 Income / (Loss) $120,600.00 $142,752.00 $22,152.00

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