Question

Differential Analysis Involving Opportunity Costs On October 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 $149,200 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 $149,200 Life of store equipment 16 years Estimated residual value of store equipment $17,600 Yearly costs to operate the store, excluding depreciation of store equipment $55,700 Yearly expected revenues—years 1-8 $75,900 Yearly expected revenues—years 9-16 $69,400 Required: 1. 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). If an amount is zero, enter zero "0". Differential Analysis Operate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2) October 1 Operate Retail Store (Alternative 1) Invest in Bonds (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ $ $ Costs: Costs to operate store Cost of equipment less residual value Income (Loss) $ $ $ 2. Based on the results disclosed by the differential analysis, should the proposal to operate a retail store be accepted? 3. If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years? $

Answer 1

Matrix Stores Inc
Differential Analysis
October 1st
	Operate Retail Store =(Alt. 1)	Invest in Bonds (Alt. 2)	Differential value
Revenue	$ 1,162,400.00	$    143,232.00	$ 1,019,168.00
Residual Value	$       17,600.00	$    142,900.00	$   (125,300.00)
Net Revenue	$ 1,180,000.00	$    286,132.00	$      893,868.00
Costs of Investment	$     149,200.00	$    149,200.00	$                       -
Maintainance cost	$     891,200.00	$                     -	$      891,200.00
Total Cost	$ 1,040,400.00	$    149,200.00	$      891,200.00
Net Return	$     139,600.00	$    136,932.00	$          2,668.00

Return on bond
	Years	Annual Return	Total Return
Interest	1-16	$        8,952.00	$      143,232.00
Total Return			$      143,232.00

Revenue in Operating store
	Years	Annual Return	Total Return
Revenue	1-8	$      75,900.00	$      607,200.00
Revenue	9-16	$      69,400.00	$      555,200.00
Total Return			$ 1,162,400.00

Part 2)    Based on the Above Differential analysis Operating retail Store (Alternative 1) gives higher income so it should be accepted.
Part 3)     Total Estimated income from Store Operation will be $139600.