On March 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to

Question:

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 ……………..........……….… 14 years

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


Instructions

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.

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 14 years?

Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
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