Response to the following problem:
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:
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 $73,000
Required:
A. 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).