Prepare differential analysis involving opportunity costs
Prepare differential analysis involving opportunity costs
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Financial Accounting
Differential analysis involving opportunity costs
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 $150,000
Life of store equipment 16 years
Estimated residual value of store equipment $18,000
Yearly costs to operate the store, excluding depreciation of store equipment
$56,000
Yearly expected revenues—years 1?8 $75,000
Yearly expected revenues—years 9?16 $70,000
Instructions
1. 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).
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 income from
operations of the store for the 16 years?