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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

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:

Line Item Description Amount
Cost of store equipment $1,500,000
Life of store equipment 15 years
Estimated residual value of store equipment $75,000
Yearly costs to operate the store, excluding depreciation of store equipment $320,000
Yearly expected revenuesyears 1-6 $400,000
Yearly expected revenuesyears 7-15 $600,000

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Question Content Area

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) July 1
Line Item Description Operate Retail Store (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)

Question Content Area

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?

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