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 $900,000 of 3% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Revenues/costs Amount Cost of store equipment $900,000 Life of store equipment 15 years Estimated residual value of equipment $45,000 Annual store operating costs less depreciation 200,000 Annual expected revenues in years 1-6 250,000 Annual expected revenues in years 7-15 300,000 Problem 1 Instructions a. 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). b. Based on the results disclosed by the differential analysis, should the proposal be accepted? c. If the proposal is accepted, what would be the total estimated income from operations of the store for the 15 years?
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
$900,000 of 3% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at
face value. The following data have been assembled:
Revenues/costs Amount
Cost of store equipment $900,000
Life of store equipment 15 years
Estimated residual value of equipment $45,000
Annual store operating costs less
Annual expected revenues in years 1-6 250,000
Annual expected revenues in years 7-15 300,000
Problem 1 Instructions
a. 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).
b. Based on the results disclosed by the differential analysis, should the proposal be accepted?
c. If the proposal is accepted, what would be the total estimated income from operations of
the store for the 15 years?
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