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: 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 (Alt. 1) or Invest in Bonds (Alt. 2) 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) $ $ $ Based on the results disclosed by the differential analysis, should the proposal be accepted? If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
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:
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Cost of store equipment |
$1,000,000 |
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Life of store equipment |
15 years |
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Estimated residual value of store equipment |
$50,000 |
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Yearly costs to operate the store, excluding |
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$200,000 |
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Yearly expected revenues—years 1–6 |
$300,000 |
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Yearly expected revenues—years 7–15 |
$400,000 |
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Required:
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".
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Differential Analysis |
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Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2) |
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August 1 |
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Operate |
Invest in |
Differential |
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Revenues |
$ |
$ |
$ |
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Costs: |
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Costs to operate store |
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Cost of equipment less residual value |
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$ |
$ |
$ |
Based on the results disclosed by the differential analysis, should the proposal be accepted?
If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
$
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