Differential Analysis Report Involving Opportunity Costs Five Star is considerin

Question

Differential Analysis Report Involving Opportunity Costs

Five Star 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 $900,000 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 equipment: $900,000

Life of equipment: 15 yrs

Estimated residual value of equipment: $100,000

Yearly costs to operate the warehouse, excludding depreciation of equipment: $175,000

Yearly expected revenues - years 1-7: $400,000

Yearly expected reveunes - years 8-15: $250,000

Differential Analysis Report

Differential revenue from alternatives:

Revenue from operating warehouse: $____

Revenue from investment in bonds: ____

Differential revenue from operating warehouue: $____

Differential cost of alternatives:

Cost to operate warehouse: $____

Cost of equipment less residual value: ____

Differential cost of operating waarehouse: _____

Differential income from operating warehoues: $______

Explanation / Answer

Revenue from Operating warehouse: (400,000*7)+(250,000*8)= $4,800,000

Revenue from Investment in bonds: interest receied on this= 900,000*4%*15=540,000

Differential Revenue from Operating warehouse= $4,260,000

Cost to operate Ware house=175,000*15=$2,100,000

Cost to equipment less residual value=900,000-100,000=$800,000

Differential cost of operating warehouse=(2,100,000+800,000)=$2,900,000

Income from Operating warehouse=4,800,000-2,900,000=$1,900,000

Income from Operating warehouse=540,000

Differential income from warehouse= 1,900,000-540,000= $1,360,000

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