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 ass
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 ass
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 15PROB
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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 | ||
| $200,000 | ||
| Yearly expected revenues—years 1–6 | $300,000 | |
| Yearly expected revenues—years 7–15 | $400,000 |
Transcribed Image Text:3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
4,950,000 X
Transcribed Image Text: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".
Revenues
Costs:
Differential Analysis
Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2)
August 1
Costs to operate store
Cost of equipment less residual value
Profit (loss)
Operate
Invest in
Differential
Effects
Retail
Bonds
(Alternative 1) (Alternative 2) (Alternative 2)
000
0001
-1,540,000 X
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