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 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 AnalysisOperate Retail (Alt. 1) or Invest in Bonds (Alt. 2)August 1 Operate Retail (Alternative 1) Invest in Bonds (Alternative 2) Differential Effects (Alternative 2) Revenues $ $ $f Costs: Costs to operate store Cost of equipment less residual value Profit (loss) $ $ $ 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? $

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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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

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 AnalysisOperate Retail (Alt. 1) or Invest in Bonds (Alt. 2)August 1

	Operate Retail (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$f
Costs:
Costs to operate store
Cost of equipment less residual value
Profit (loss)	$	$	$