Problem - Differential analysis report involving opportunity costs
On November 7, 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 years
Estimated residual value of equipment $100,000
Yearly costs to operate the warehouse, excluding depreciation of equipment $175,000
Yearly expected revenues-years 1-7 $400,000
Yearly expected revenues-years 8-15 $250,000
Instructions -
1. Prepare a report as of November 7, 2012, presenting a differential analysis of the proposed operation of the warehouse for the 15 years as compared with present conditions.
2. Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 15 years?