before being fornm The furn Chapter 24 Differential Analysis and Product Pricing
ID: 2412624 • Letter: B
Question
before being fornm The furn Chapter 24 Differential Analysis and Product Pricing Series A PR 24-1A Differential analysis involving opportunity costs 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: Obj Cost of store equipment Life of store equipment Estimated residual value of store equipment Yearly costs to operate the store, excluding $1,000,000 15 years $50,000 depreciation of store equipment Yearly expected revenues-years 1-6 Yearly expected revenues-years 7-15 $200,000 $300,000 $400,000 Instructions 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). 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? If the proposal is accepted, what would be the total estimated income from operations of the store for the 15 years?Explanation / Answer
1.
*Revenues
Operate Retail Store = ($300000 x 6) + ($400000 x 9) = $1800000 + $3600000 = $5400000
Invest in Bonds = $1000000 x 4% x 15 = $600000
2. Yes. The proposal to operate the retail store should be accepted.
3.
Rantoul Stores Inc. Differential Analysis Operate a retail store or Invest in Bonds August 1 Operate Retail Store Invest in Bonds Differential effect on income (Alternative 1) (Alternative 2) (Alternative 2) Revenues* 5400000 600000 -4800000 Costs: Cost to operate retail store ($200000 x 15) 3000000 0 3000000 Cost of equipment less residual value 950000 0 950000 Income (loss) 1450000 600000 -850000Related Questions
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