Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $4,055. The freight and installation costs for the equipment are $478. If purchased, annual repairs and maintenance are estimated to be $419 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,789 per year for four years, with no additional costs.

	Required:
a.	Prepare a differential analysis dated December 3 to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. (Hint: This is a “lease or buy” decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.)
b.	Determine whether the Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment.

LabelsCash flows from operating activitiesCostsAmount DescriptionsFreight and installationImport tariffIncome (loss)Lease (4 years)Purchase priceRepair and maintenance (4 years)Revenues

a. Prepare a differential analysis dated December 3 to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

Hint: This is a “lease or buy” decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.

Differential Analysis

Lease (Alternative 1) or Buy (Alternative 2) Equipment

December 3

1		Lease Equipment	Buy Equipment	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8
9

b. Determine whether the Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment.

Lease the equipment

The company is indifferent since the result is the same regardless of which alternative is chosen.

Buy the equipment

Answer 1

Differential Analysis:
			Lease	Buy	Differential effect on
					Income
Lease rent for 4 years			7156	0	7156
Cost of equipment			0	4055	-4055
Firght and installation charges				478	-478
Annual Maintenance cost (419*4)			0	1676	-1676
Net effect			7156	6209	947
Hence, the equipment shall be BOUGHT