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Example of a differential analysis report.

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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

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Solution Summary

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

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See Also This Related BrainMass Solution

Prepare a differential analysis report: Devoe Construction Company

Devoe Construction Company is considering selling excess machinery with a book value of $280,000 (original cost of $400,000 less accumulated depreciation of $120,000) for $292,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $312,000 fr five years, after which it is expected to have no residual value. During this period of the lease, Devoe Construction Company's cost of repairs, insurance, and property tax expenses are expected to be $36,000.

a. Prepare a differential analysis report, dated January 3, 2010, for the lease or sell decision.

b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain

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