Five Star is considering leasing a building and buying the

#8907
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 ........................................ $900,000Life
of equipment ..........................................15 yearsEstimated residual value of equipment
................. $100,000Yearly costs to operate the warehouse,excluding depreciation of
equipment .................. $175,000Yearly expected revenues-years 1-7 .................
$400,000Yearly expected revenues-years 8-15 ............... $250,000Instructions1. Prepare a
differential analysis report of the proposed operation of the warehouse for the15 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
operating income of the warehouse for the 15 years?View Solution:
Five Star is considering leasing a building and buying the

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