On July 1, Campus 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 $1,500,000 of 2% 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 Life of store equipment Estimated residual value of store equipment Yearly costs to operate the store, excluding depreciation of store equipment Yearly expected revenues-years 1-6 Yearly expected revenues-years 7-15 Required: 1. Prepare a differential analysis as of July 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". If required, use a minus sign to indicate a loss. Line Item Description Revenues Costs: $1,500,000 15 years $75,000 $320,000 $400,000 $600,000 Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Costs to operate store Cost of equipment less residual value Profit (loss) Operate Retail Store (Alternative 1) DD Invest in Bonds (Alternative 2) Differential Effects (Alternative 2) E 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
On July 1, Campus 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 $1,500,000 of 2% 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 Life of store equipment Estimated residual value of store equipment Yearly costs to operate the store, excluding depreciation of store equipment Yearly expected revenues-years 1-6 Yearly expected revenues-years 7-15 Required: 1. Prepare a differential analysis as of July 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". If required, use a minus sign to indicate a loss. Line Item Description Revenues Costs: $1,500,000 15 years $75,000 $320,000 $400,000 $600,000 Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) July 1 Costs to operate store Cost of equipment less residual value Profit (loss) Operate Retail Store (Alternative 1) DD Invest in Bonds (Alternative 2) Differential Effects (Alternative 2) E 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Differential analysis involving opportunity cost
Transcribed Image Text:On July 1, Campus 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 $1,500,000 of 2% 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
Life of store equipment
Estimated residual value of store equipment
Yearly costs to operate the store, excluding
depreciation of store equipment
Yearly expected revenues-years 1-6
Yearly expected revenues-years 7-15
< Required:
1. Prepare a differential analysis as of July 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". If
required, use a minus sign to indicate a loss.
Line Item Description
Revenues
Costs:
$1,500,000
15 years
$75,000
$320,000
$400,000
$600,000
Differential Analysis
Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
Costs to operate store
Cost of equipment less residual value
Profit (loss)
Operate Retail Store
(Alternative 1)
Invest in Bonds
(Alternative 2)
OT
Differential Effects
(Alternative 2)
2. Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
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