On July 1, Daybreak 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 $280,000 of 5% U.S. Treasury bonds that mature in 20 years. The bonds could be purchased at face value. The following data have been assembled:
|
Cost of store equipment |
$280,000 |
|
Life of store equipment |
20 years |
|
Estimated residual value of store equipment |
$20,000 |
|
Yearly costs to operate the store, excluding |
|
|
depreciation of store equipment |
$70,000 |
|
Yearly expected revenues—years 1–10 |
$88,000 |
|
Yearly expected revenues—years 11–20 |
$96,000 |
Instructions
1. Prepare a report as of July 1, 2008, presenting a differential analysis of the proposed operation of the store for the 20 years as compared with present conditions.
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 20 years?