On July 1, Matrix Stores Inc. is considering leasing a building and buying the n

Question

On July 1, Matrix Stores Inc. 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 $151,700 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:

Cost of store equipment $151,700 Life of store equipment 16 years Estimated residual value of store equipment $18,300 Yearly costs to operate the warehouse, excluding depreciation of equipment depreciation of store equipment $56,500 Yearly expected revenues—years 1-8 74,700 Yearly expected revenues—years 9-16 69,400
1. Prepare a differential analysis as 0?uly 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 enter "O". For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an armount is zero Differential Analysis Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2) Operate Warehouse (Alternative 1) Invest in Bonds(lternetive 2) Differential Effect on Income (Alternative 2) Revenues Costs Coets to operate warehouse Cost of equipment less residual value Income (Loss) 2. Based on the results disclosed by the differential analysis, should the proposal to operate a retail store be accepted? 3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 16 years?

Explanation / Answer

Differential Analysis (All In $) Warehouse Invest in Bonds Differential Revenues 1152800 297332 855468 Less: Cost to Operate Warehouse 904000 0 904000 Cost of Equipment less Residual 133400 0 133400 Income(loss) 115400 297332 -181932 The Proposal to Operate Warehouse is not fesabile as it is contributing less income * Time Value of Money Not Considered,If Considered Decision May Differ

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