Question

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 $162,000 of 5% 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	$162,000
Life of store equipment	16 years
Estimated residual value of store equipment	$12,800
Yearly costs to operate the store, excluding depreciation of store equipment	$61,795
Yearly expected revenues—years 1–8	$83,600
Yearly expected revenues—years 9–16	$74,700

	Required:
1.	Prepare a differential analysis as of August 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). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
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 income from operations of the store for the 16 years?

Score: 23/71 Differential Analysis Operate Retail Store (Alternative 1) or Invested in U.S. Treasury Bonds (Alternative 2) August 1 Operate Retai Invested in U.S. Differential Effect Store Treasury Bonds on Income Alternative 1) (Altative (Alternative 2) 3 Revenues 4 Costs: 5Costs to operate store 6 Cost of equipment less residual value 7 Income (loss)

Answer 1

1.

Differential Analysis
Operate Retail Store (Alternative 1) or Invested in U.S. Treasury Bonds (Alternative 2)
August 1
	Operate Retail Store	Invested in U.S. Treasury Bonds	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues	1266400	129600	-1136800
Costs:
Costs to operate store	-988720	0	988720
Cost of equipment less residual value	-149200	0	149200
Income (loss)	128480	129600	1120

Working:

Revenues

Operate Retail Store = ($83600 x 8) + ($74700 x 8) = $668800 + $597600 = $1266400

Invest in Bonds = $162000 x 5% x 16 = $129600

Costs to operate store = $61795 x 16 = $988720

Cost of equipment less residual value = $162000 - $12800 = $149200

2. No. The proposal to operate the retail store should not be accepted.

3.

Estimated Income from Operations
Total estimated revenue	1266400
Less: Estimated costs
Costs to operate retail store	988720
Cost of store equipment	149200
Total estimated income from operating retail store	128480