Problem:
On March 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 $750,000 of 7% 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 equipment $750,000
Life of equipment 14years
Estimated residual value of equipment $76,000
Yearly costs to operate the warehouse, excluding
depreciation of equipment $195,000
Yearly expected revenues---years 1-7 $330,000
Yearly expected revenues---years 8-14 $280,000
1. Prepare a report as of March 1, 2010, presenting a differential analysis of the proposed operation of the warehouse for the 14 years as compared with present conditions.
Note: Use the minus sign to indicate a differential loss.