Differential Analysis Involving Opportunity CostsOn August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 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 store equipment$1,000,000Life of store equipment15 yearsEstimated residual value of store equipment$50,000Yearly costs to operate the store, excluding depreciation of store equipment$200,000Yearly expected revenues—years 1–6$300,000Yearly expected revenues—years 7–15$400,000 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?4,950,000 X Required:1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds(Alternative 2). If an amount is zero, enter "0".RevenuesCosts:Differential AnalysisOperate Retail (Alt. 1) or Invest in Bonds (Alt. 2)August 1Costs to operate storeCost of equipment less residual valueProfit (loss)OperateInvest inDifferentialEffectsRetailBonds(Alternative 1) (Alternative 2) (Alternative 2)0000001-1,540,000 X

Differential analysis, also known as incremental analysis or relevant cost analysis, is a…

Answered: August 1, Rantoul Stores Inc. is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Differential Analysis Involving Opportunity Costs

On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 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 store equipment	$1,000,000
Life of store equipment	15 years
Estimated residual value of store equipment	$50,000
Yearly costs to operate the store, excluding
	depreciation of store equipment	$200,000
Yearly expected revenues—years 1–6	$300,000
Yearly expected revenues—years 7–15	$400,000

3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
4,950,000 X

Required:
1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds
(Alternative 2). If an amount is zero, enter "0".
Revenues
Costs:
Differential Analysis
Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2)
August 1
Costs to operate store
Cost of equipment less residual value
Profit (loss)
Operate
Invest in
Differential
Effects
Retail
Bonds
(Alternative 1) (Alternative 2) (Alternative 2)
000
0001
-1,540,000 X

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