Differential Analysis Involving Opportunity Costs On July 1, Midway Distribution

Question

Differential Analysis Involving Opportunity Costs

On July 1, Midway 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 $150,300 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:

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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Cost of store equipment $150,300 Life of store equipment 16 years Estimated residual value of store equipment $17,600 Yearly costs to operate the warehouse, excluding depreciation of equipment depreciation of store equipment $55,800 Yearly expected revenues—years 1-8 75,400 Yearly expected revenues—years 9-16 69,700

Explanation / Answer

Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) Operate Warehouse (Alternative 1) Invest in Bonds (Alternative 2) Differential Effect on Income (Alternative 2) Revenues 1160800 144288 -1016512 Costs: Costs to operate warehouse -892800 892800 Cost of equipment less residual value -132700 132700 Income (Loss) 135300 144288 8988

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