**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…

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

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