Differential Analysis Involving Opportunity Costs

On October 1, Midway Distribution Company 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 $150,800 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		$150,800
Life of store equipment		16 years
Estimated residual value of store equipment		$18,100
Yearly costs to operate the store, excluding
	depreciation of store equipment	$56,600
Yearly expected revenuesyears 1-8		$74,700
Yearly expected revenuesyears 9-16		$70,200

Required:

Question Content Area

1. Prepare a differential analysis as of October 1 to determine whether to Operate Retail Store (Alternative 1) or Invest in Bonds (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

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 Effects (Alternative 2)
Revenues	$fill in the blank 43faf1021f9ef95_1	$fill in the blank 43faf1021f9ef95_2	$fill in the blank 43faf1021f9ef95_3
Costs:
Costs to operate store	fill in the blank 43faf1021f9ef95_4	fill in the blank 43faf1021f9ef95_5	fill in the blank 43faf1021f9ef95_6
Cost of equipment less residual value	fill in the blank 43faf1021f9ef95_7	fill in the blank 43faf1021f9ef95_8	fill in the blank 43faf1021f9ef95_9
Profit (loss)	$fill in the blank 43faf1021f9ef95_10	$fill in the blank 43faf1021f9ef95_11	$fill in the blank 43faf1021f9ef95_12

Question Content Area

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

YesNo

3. If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years? $fill in the blank 68eb2aff600101d_2