Question

On October 1, White Way 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 $176,000 of 7% 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	$176,000
Life of store equipment	16 years
Estimated residual value of store equipment	$16,800
Yearly costs to operate the store, excluding depreciation of store equipment	$57,740
Yearly expected revenues—years 1–8	$87,700
Yearly expected revenues—years 9–16	$72,000

A. 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). 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.

Score: 34/71

Differential Analysis

Operate Retail Store (Alternative 1) or Invest in Bonds (Alternative 2)

October 1

1		Operate Retail Store	Invest in Bonds	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	✔
4	✔
5	✔		✔
6	✔		✔
7	✔

f the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years?

$_____.

Answer 1

1	Differential Analysis
		Operate Retail Store	Invest in Bonds	Differential Effect on Income
		Alt 1	Alt 2	Alt 2
	Revenues	127,7600	197,120	-1,080,480
	Costs:
	Cost to operate store	-923,840	0	923,840
	Cost of equipment less residual value	-159,200	0	159,200
	Income / ( Loss )	194,560	197,120	2,560
	The proposal to operate Retail store should not be accepted
2	Estimated Income from retail store
	= $ 194560

Working		Operate Retail Store	Invest in Bonds
		Alt 1	Alt 2
	Revenues	=(87700*8)+(72000*8)	=176000*7%*16
	Costs:
	Cost to operate store	=-57740*16	0
	Cost of equipment less residual value	=-(176000-16800)	0