Prepare a differential analysis

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.

Solution: