On August 1, Rantoul 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 $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:Cost of store equipment$1,000,000Life of store equipment15 yearsEstimated residual value of store equipment$50,000Yearly costs to operate the store, excluding depreciation of store equipment$200,000Yearly expected revenues—years 1–6$300,000Yearly expected revenues—years 7–15$400,000 Required:1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0".

Revenue from Operate Retail Store = $300,000*6 years + $400,000*9 years…

Answered: On August 1, Rantoul Stores Inc. is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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On August 1, Rantoul 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 $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:

Cost of store equipment	$1,000,000
Life of store equipment	15 years
Estimated residual value of store equipment	$50,000
Yearly costs to operate the store, excluding
	depreciation of store equipment	$200,000
Yearly expected revenues—years 1–6	$300,000
Yearly expected revenues—years 7–15	$400,000

Required:

1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0".

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