On October 1, White Way Stores Inc. is considering leasing a building and purcha
ID: 2445613 • Letter: O
Question
On October 1, White Way 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 $180,000 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:
If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years?
Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
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Score: 28/71
Differential Analysis
Operate Retail Store (Alternative 1) or Invest in Bonds (Alternative 2)
October 1
1
Operate Retail Store
Invest in Bonds
Differential Effect on Income
2
(Alternative 1)
(Alternative 2)
(Alternative 2)
3
4
5
6
7
Cost of store equipment $180,000 Life of store equipment 16 years Estimated residual value of store equipment $15,000 Yearly costs to operate the store, excluding depreciation of store equipment $58,000 Yearly expected revenues—years 1–8 $85,000 Yearly expected revenues—years 9–16 $73,000Explanation / Answer
1.
Operate Retail Stores
(Alternative -1)
Invest in Bonds
(Alternative – 2)
Differential Effect on Income (Alternative 2)
Revenues
1264000
172800
0
Costs:
Costs to operate store
928000
0
0
Cost of equipment less residual value
165000
0
0
Income (Loss)
171000
172800
0
2. Based on the results disclosed by the differential analysis, proposal should not be accepted because investment in bond is more profitable.
3. Total estimated income from operations of the store for the 16 years will be = $171000
Operate Retail Stores
(Alternative -1)
Invest in Bonds
(Alternative – 2)
Differential Effect on Income (Alternative 2)
Revenues
1264000
172800
0
Costs:
Costs to operate store
928000
0
0
Cost of equipment less residual value
165000
0
0
Income (Loss)
171000
172800
0
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