Question

Differential Analysis Involving Opportunity Costs

On July 1, Matrix Stores Inc. is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $151,900 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		$151,900
Life of store equipment		16 years
Estimated residual value of store equipment		$18,300
Yearly costs to operate the warehouse, excluding depreciation of equipment
	depreciation of store equipment	$56,700
Yearly expected revenues—years 1-8		74,300
Yearly expected revenues—years 9-16		69,100

Required:

1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Operate Warehouse (Alt. 1) or Invest in Bonds (Alt. 2)
July 1
	Operate Warehouse (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Costs to operate warehouse
Cost of equipment less residual value
Income (Loss)	$	$	$

Feedback

Incorrect

2. Based on the results disclosed by the differential analysis, should the proposal to operate a retail store be accepted?

3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 16 years?
$

Answer 1

Solution 1:

Differential Analysis - Matrix Stores Inc.
Operate Retail Store (Alt 1) or Invest in Bonds (Alt2)
Particulars	Operate Warehouse (alt 1)	Invest in Bonds (alt 2)	Differential effect on income (Alt 2)
	Amount	Amount
Revenues	$1,147,200.00	$145,824.00	-$1,001,376.00
Costs:
Costs to operate warehouse	$907,200.00	$0.00	-$907,200.00
Cost of equipment less residual value	$133,600.00	$0.00	-$133,600.00
Income / (Loss)	$106,400.00	$145,824.00	$39,424.00

Solution 2:

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

Solution 3:

If the proposal is accepted, total estimated income from operations of the warehouse for the 16 years = $106,400