On August 1, Rantoul Stores Inc. is considering leasing a building and purchasin

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 $162,000 of 5% 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 $162,000 Life of store equipment 16 years Estimated residual value of store equipment $12,800 Yearly costs to operate the store, excluding depreciation of store equipment $61,795 Yearly expected revenues—years 1–8 $83,600 Yearly expected revenues—years 9–16 $74,700

Explanation / Answer

1.

Working:

Revenues

Operate Retail Store = ($83600 x 8) + ($74700 x 8) = $668800 + $597600 = $1266400

Invest in Bonds = $162000 x 5% x 16 = $129600

Costs to operate store = $61795 x 16 = $988720

Cost of equipment less residual value = $162000 - $12800 = $149200

2. No. The proposal to operate the retail store should not be accepted.

3.

Differential Analysis Operate Retail Store (Alternative 1) or Invested in U.S. Treasury Bonds (Alternative 2) August 1 Operate Retail Store Invested in U.S. Treasury Bonds Differential Effect on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues 1266400 129600 -1136800 Costs: Costs to operate store -988720 0 988720 Cost of equipment less residual value -149200 0 149200 Income (loss) 128480 129600 1120

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.