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 $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). 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 15 years?

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). 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: 47/71

Differential Analysis

Operate Retail Store (Alternative 1) or Invested in U.S. Treasury Bonds (Alternative 2)

August 1

1		Operate Retail Store	Invested in U.S. Treasury Bonds	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	?	?	?	?
4	?
5	?		?
6	?		?
7	?		?

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

Yes

The company is indifferent since the result is the same regardless of which alternative is chosen.

No

Points:

0 / 1

3. If the proposal is accepted, what would be the total estimated income from operations of the store for the 15 years?

Answer 1

Solution 1:

Differential Analysis - Rantoul Stores Inc.
Operate Retail Store (Alt 1) or Invest in U.S. TreasuryBonds (Alt2)
Particulars	Operate Retail Store (alt 1)	Invest in US Treasury Bonds (alt 2)	Differential effect on income (Alt 2)
Amount	Amount
Revenues	$5,400,000.00	$640,000.00	-$4,760,000.00
Costs:
Costs to operate store	$3,000,000.00	$0.00	-$3,000,000.00
Cost of equipment less residual value	$950,000.00	$0.00	-$950,000.00
Income / (Loss)	$1,450,000.00	$640,000.00	-$810,000.00

Solution 2:

Yes, proposal to operate retail store should be accepted.

Solution 3:

estimated income from operations of the store for the 15 years = $1,450,000