Reference no: EM132767661
Problem - 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 depreciation of store equipment $200,000
Yearly expected revenues-years 1-6 $300,000
Yearly expected revenues-years 7-15 $400,000
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).
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?