On August 1, Matrix Stores Inc. is considering leasing a building and purchasing

Question

On August 1, Matrix 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 $150,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

1. Prepare a differential analysis as of August 1, 2012, presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter zero "0".

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

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

Explanation / Answer

Hi,

Please find the revised answer as follows:

Operate Retail Store Invest in Bonds Differential Effect on Income Revenues 1160000 144000 1016000 Costs


Cost to Operate Store 1060000 0 1060000 Cost of Equipment Less Residual Value 132000 0 132000 Income Loss -32000 144000 176000

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