Homework Help is Here – Start Your Trial Now!
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
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
**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.)
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 - 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:** $____________
Transcribed Image Text:**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:** $____________
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Financial Planning Model
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS