Question
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
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: 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 $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) $Profit (loss) Feedback Area Feedback Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal rate time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? Question Content Area 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? Yes 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? fill in the blank 1 of 1$
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