Differential Analysis Involving Opportunity Costs On July 1, Campus Stores Inc. is considering leasing a building...
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Differential Analysis Involving Opportunity Costs On July 1, Campus 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 $1,500,000 of 2% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment Life of store equipment Estimated residual value of store equipment $1,500,000 15 years $75,000 Yearly costs to operate the store, excluding depreciation of store equipment $320,000 Yearly expected revenues-years 1-6 $400,000 Yearly expected revenues-years 7-15 $600,000 Required: 1. Prepare a differential analysis as of July 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). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis 1. Prepare a differential analysis as of July 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). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) Line Item Description Revenues July 1 Operate Retail Store Invest in Bonds (Alternative 1) (Alternative 2) Differential Effects (Alternative 2) Costs: Costs to operate store Cost of equipment less residual value Profit (loss) Feedback Check My Work Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal x rate x time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? Yes 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? Feedback Check My Work Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal x rate x time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? Feedback Check My Work Partially correct Differential Analysis Involving Opportunity Costs On July 1, Campus 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 $1,500,000 of 2% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment Life of store equipment Estimated residual value of store equipment $1,500,000 15 years $75,000 Yearly costs to operate the store, excluding depreciation of store equipment $320,000 Yearly expected revenues-years 1-6 $400,000 Yearly expected revenues-years 7-15 $600,000 Required: 1. Prepare a differential analysis as of July 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). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis 1. Prepare a differential analysis as of July 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). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) Line Item Description Revenues July 1 Operate Retail Store Invest in Bonds (Alternative 1) (Alternative 2) Differential Effects (Alternative 2) Costs: Costs to operate store Cost of equipment less residual value Profit (loss) Feedback Check My Work Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal x rate x time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? Yes 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? Feedback Check My Work Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal x rate x time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? Feedback Check My Work Partially correct
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