differential analysis involving opportunity costs 418478

On August 1, Matrix 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 $150,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment: $150000

Life of store equipment: 16 years

Estimated residual value of store equipment: $18000

Yearly costs to operate the store, excluding depreciation of store equipment $56000

Yearly expected revenues ‘ years 1 ‘ 8 $75000

Yearly expected revenues ‘ years 9 ‘ 16 $70000

Prepare a differential analysis as of August 1, 2012, presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter zero “0”.

Operate Retail Store (Alternative 1)

Revenues

Costs

Costs to operate store

Cost of equipment less residual value

Income (Loss)

Invested in Bonds (Alternative 2)

Revenues

Costs

Costs to operate store

Cost of equipment less residual value

Income (Loss)

Differential Effect on Income (Alternative 2)

Revenues

Costs

Costs to operate store

Cost of equipment less residual value

Income (Loss)