ACCT Assignment 6

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