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

Required:

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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	$Revenues	$Revenues	$Revenues
Costs:
Costs to operate store	Costs to operate store	Costs to operate store	Costs to operate store
Cost of equipment less residual value	Cost of equipment less residual value	Cost of equipment less residual value	Cost of equipment less residual value
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)

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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 rate 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?

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

YesNoYes

3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? fill in the blank 1 of 1$

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