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 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". Differential Analysis Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2) August 1 Operate Invest in Differential Retail Bonds Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs:
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 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". Differential Analysis Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2) August 1 Operate Invest in Differential Retail Bonds Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
Transcribed Image Text: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
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".
Differential Analysis
Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2)
August 1
Operate
Invest in
Differential
Retail
Bonds
Effects
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues
$
$
2$
Costs:
Costs to operate store
Cost of equipment less residual value
Profit (loss)
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