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 $1,000,000 15 years $50,000 $200,000 $300,000 $400,000
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:
Instructions
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).
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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