On August 1, Midway Distribution Company is considering leasing a building and p

Question

On August 1, Midway Distribution Company 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 $148,600 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:

Required:

1. Prepare a differential analysis as of August 1, 2014, 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".

Differential Analysis

Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)

August 1, 2014

Operate Retail Store (Alternative 1)

Invest in Bonds (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$  

$  

$  

Costs:

Costs to operate store

  

  

  

Cost of equipment less residual value

  

  

  

Income (Loss)

$  

$  

$  

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

Yes or No

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

Cost of store equipment $148,600 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 $56,100 Yearly expected revenues—years 1-8 75,300 Yearly expected revenues—years 9-16 69,200

Explanation / Answer

1.

Operate Retail Stores

(Alternative -1)

Invest in Bonds

(Alternative – 2)

Differential Effect on Income (Alternative 2)

Revenues

1174400

142656

0

Costs:

Costs to operate store

897600

0

0

Cost of equipment less residual value

130200

0

0

Income (Loss)

146600

142656

0

2. Yes.

3. Total estimated income from operations of the store for the 16 years will be = $146600

Operate Retail Stores

(Alternative -1)

Invest in Bonds

(Alternative – 2)

Differential Effect on Income (Alternative 2)

Revenues

1174400

142656

0

Costs:

Costs to operate store

897600

0

0

Cost of equipment less residual value

130200

0

0

Income (Loss)

146600

142656

0

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