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:

Cost of store equipment		$1,000,000
Life of store equipment		15 years
Estimated residual value of store equipment		$50,000
Yearly costs to operate the store, excluding
	depreciation of store equipment	$200,000
Yearly expected revenuesyears 16		$300,000
Yearly expected revenuesyears 715		$400,000

Required:

Question Content Area

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). If an amount is zero, enter "0".

Differential Analysis Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2) August 1

	Operate Retail (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues
Costs:
Costs to operate store
Cost of equipment less residual value
Profit (loss)