**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 - 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 (Alternative 1) | Invest in Bonds (Alternative 2) | Differential Effects (Alternative 2) ||----------------------------|--------------------------------|---------------------------------|--------------------------------------|| **Revenues** | $ | $ | $ |(Note: Insert the appropriate calculation values under each alternative heading for a complete analysis.) **Differential Analysis: Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2)****Date: August 1**| | Operate Retail (Alternative 1) | Invest in Bonds (Alternative 2) | Differential Effects (Alternative 2) ||--------------------------|--------------------------------|---------------------------------|--------------------------------------|| **Revenues** | $ | $ | $ || **Costs:** | | | || - Costs to operate store | $ | $ | $ || - Cost of equipment less residual value | $ | $ | $ || **Profit (loss)** | $ | $ | $ |**Feedback:****Check My Work:**- Subtract the operate costs (15 years) and the cost of the equipment less the residual value from the revenues from operating. Determine the bond investment interest income for 15 years (principal × rate × time).- Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1.- Which alternative has the most desirable effect on income?**2.** Based on the results disclosed by the differential analysis, should the proposal be accepted?- **Response:** Yes ✅**3.** If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?- **Response:** $____________

Solution 1: Differential Analysis - Rantoul Stores Inc. Operate Retail (Alt 1) or Invest in Bonds (Alt2) Particulars Operate Retail (alt 1) Invest in Bonds (alt 2) Differential effect on income (Alt 2) Amount Amount Revenues $5,400,000.00 $600,000.00 -$4,800,000.00 Costs: Costs to operate store $3,000,000.00 $0.00 -$3,000,000.00 Cost of equipment less residual value $950,000.00 $0.00 -$950,000.00 Income / (Loss) $1,450,000.00 $600,000.00 -$850,000.00 Solution 2: Yes, proposal to operate retail store should be accepted.Solution 3: Estimated operating income for the store for 15 years = $1,450,000

Business

Accounting

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".

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".

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Caddis Company acquired a building with a loan that requires payments of $19,000 every six months for 3 years. The annual interest rate on the loan is 8%. What is the present value of the building? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Multiple Choice O O O O $99,600 $114,000 $38,988 $65,402 $48,965
Company H is planning to purchase a machine for $100,000 and will incur an additional $10,000 in installation expenses. It is replacing a similar machine that can be sold for $30,000. Because of this transaction, the company’s current assets will increase by $6,000 and current liabilities will increase by $3,000. Calculate the initial investment in this equipment. Options: A)83000 B)100000 , C)110000 D), 80000
onsider the following financial informationabout a retooling project at a computer manufacturing company:• The project costs $2.5 million and has a five-yearservice life.• The retooling project can be classified as sevenyear property under the MACRS rule.• At the end of the fifth year, any assets held for theproject will be sold. The expected salvage valuewill be about 10% of the initial project cost.• The firm will finance 40% of the project moneyfrom an outside financial institution at an interestrate of 10%. The firm is required to repay the loanwith five equal annual payments.• The firm’s incremental (marginal) tax rate on theinvestment is 35%.• The firm’s MARR is 18%.With the preceding financial information,(a) Determine the after-tax cash flows.(b) Compute the annual equivalent worth for thisproject.
JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years. (2) It can license the design to another manufacturer for a period of 5 years, its likely product life. (3) It can manufacture and market the system itself; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%.Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — —…
Please help me to solve this problem
Hayden Company is considering the acquisition of a machine that costs $429,000. The machine is expected to have income of $71,400. The estimated cash payback period for the machine is (round to one decimal place) O a. 7.2 years Ob. 6.0 years O c. 1.2 years O d. 5.1 years useful life of 6 years, a negligible residual value, an annual net cash inflow of $84,000, and annual operating
The company ABC AS is considering investing in a 3D printer. The acquisition takes place on 31.12 year 0 The investment will have the assumptions described in the table on the left. Show the investment's annual cash flow in a table of the number of life years. Purchase of 3D 2 000 000 Freight in connection with the investment 75 000 Adjustments in connection with the investment 30 000 Increased income per year 275 000 Fixed payable costs per year 60 000 Distribution value at the end of the year 5 200 000 Lifetime (number of years) 5
A corporation can buy a machine for 15,000$ with life of five years and a salvage value (selling price of the machine at end of life of the project) of 1,550$. Net revenues per year are expected to be 7,000$. MARR for this corporation is 15%. Should the corporation invest in this machine? Solve by present worth method. detailed answer without using excel
National Cruise is considering purchasing a new ship that will cost $600,000,000. The president of the company asked the CFO to analyze cash flows associated with operating the ship under two alternative itineraries: Itinerary 1, Caribbean Winter/ Alaska and Itinerary 2, Caribbean/ Eastern Canada. The CFO estimatedt he following cash flows, which are expected to apply to each of the next 15 years: Caribbean/ Alaska Caribbean/ E. Canada Net revenue $120,000,000 $105,000,000 Less: Direct program expenses ($25,000,000) ($24,000,000) Indirect program expenses ($20,000,000) ($20,000,000) Non- operating expenses ($21,000,000) ($21,000,000) Add back depreciation $115,000,000 $155,000,000 Cash flow per year $169,000,000…
Help me :)
Required information A land development company is considering the purchase of earth-moving equipment. This equipment will have an estimated first cost of $163,000, a salvage value of $55,000, a life of 10 years, a maintenance cost of $32,000 per year, and an operating cost of $220 per day. Alternatively, the company can rent the necessary equipment for $1010 per day and hire a driver at $180 per day. When approached to rent for the breakeven number of days, the equipment owner indicated that the minimum rental is for 100 days per year; however, he might consider a lower daily rental cost. What is the daily rental cost to justify renting over purchasing? If the equipment was purchased, assume it would be used for the breakeven number of days. Determine the required rental cost per day. The daily rental cost to justify renting over purchasing is determined to be $
Heidi Company is considering the acquisition of a machine that costs $536,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash inflow of $104,000, and annual operating income of $84,095. The estimated cash payback period for the machine is (round to one decimal point)? Oa. 5.2 years Ob. 6.4 years Oc. 6.0 years Od. 6.5 years