Question

Differential Analysis for a Lease or Buy Decision Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,040. The freight and installation costs for the equipment are $660. If purchased, annual repairs and maintenance are estimated to be $420 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,520 per year for four years, with no additional costs. Prepare a differential analysis dated December 3, to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the machine. (Hint: This is a "lease or buy" decision, which must be analyzed from the perspective of the machine user, as opposed to the machine owner.) If an amount is zero, enter "0". Use a minus sign to indicate a loss. Differential Analysis Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2) December 3 Lease Equipment (Alternative 1) Buy Equipment (Alternative 2) Differential Effect on Income (Alternative 2) Revenues Costs: Purchase price UT Freight and installation Repair and maintenance (4 years) Lease (4 years) Income loss) Determine whether Sloan should lease (Alternative 1) or buy (Alternative 2) the equipment.

Answer 1

Solution:

Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
4-Aug
Particulars	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$0.00	$0.00	$0.00
Costs:
Purchase Price	$0.00	$3,040.00	$3,040.00
Freight and Installation	$0.00	$660.00	$660.00
Repair and Maintenance	$0.00	$1,680.00	$1,680.00
Lease (4 Years)	$6,080.00	$0.00	-$6,080.00
Income (loss)	-$6,080.00	-$5,380.00	$700.00

Company should buy the equipment.