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 $192,000 of 4% 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	$192,000
Life of store equipment	16 years
Estimated residual value of store equipment	$18,400
Yearly costs to operate the store, excluding depreciation of store equipment	$59,500
Yearly expected revenues—years 1–8	$85,900
Yearly expected revenues—years 9–16	$70,000

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

Answer 1

Solution 1:

Differential Analysis - Rantoul Stores Inc.
Operate Warehouse (Alt 1) or Invest in Bonds (Alt2)
Particulars	Operate store (alt 1)	Invest in Bonds (alt 2)	Differential effect on income (Alt 2)
	Amount	Amount
Revenues	$1,247,200.00	$122,880.00	-$1,124,320.00
Costs:
Costs to operate warehouse	$952,000.00	$0.00	-$952,000.00
Cost of equipment less residual value	$173,600.00	$0.00	-$173,600.00
Income / (Loss)	$121,600.00	$122,880.00	$1,280.00

Solution 2:

As income from store operating is lesser than income from investing in US Treasury bond, therefore proposal to operate retail store should not be accepted

Solution 3:

If the proposal is accepted, then total estimated income from operations of the store for the 16 years = $121,600