Question

Differential Analysis Involving Opportunity Costs On October 1, Matrix 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 $148,500 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment Life of store equipment $148,500 16 years $17,200 Estimated residual value of store equipment Yearly costs to operate the store, excluding depreciation of store equipment $56,400 Yearly expected revenues--years 1-8 Yearly expected revenues-years 9-16 $75,900 $70,600 Required: 1. Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter zero "0". Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) October 1 Operate Invest Differential Retail Store in Bonds Effect on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs:

Answer 1

Solution 1:

Differential Analysis - Matrix Stores Inc.
Operate Retail (Alt 1) or Invest in Bonds (Alt2)
Particulars	Operate Retail (alt 1)	Invest in Bonds (alt 2)	Differential effect on income (Alt 2)
	Amount	Amount
Revenues	$1,172,000.00	$142,560.00	-$1,029,440.00
Costs:
Costs to operate store	$902,400.00	$0.00	-$902,400.00
Cost of equipment less residual value	$131,300.00	$0.00	-$131,300.00
Income / (Loss)	$138,300.00	$142,560.00	$4,260.00

Solution 2:

No, proposal to operate retail store should not be accepted.

Solution 3:

Estimated net income for 16 years, if proposal is accepted = $138,300