Differential Analysis for a Lease or Buy Decision
Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,320. The freight and installation costs for the equipment are $600. 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 $1,540 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 | $ | $ | $ |
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.
Differential Analysis | |||
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2) | |||
December 3 | |||
Lease Equipment (Alternative 1) (a) |
Buy Equipment (Alternative 2) (b) |
Differential Effect on Income (if Alternative 2 is
chosen) (a - b) |
|
Revenues | $0 | $0 | $0 |
Costs: | |||
Purchase price | $0 | $3,320 | ($3,320) |
Freight and Installation | $0 | $600 | ($600) |
Repairs and maintenance (4 years) [$420 x 4 years] | $0 | $1,680 | ($1,680) |
Lease (4 Years) [$1,540 x 4 years] | $6,160 | $0 | $6,160 |
Income (Loss) [Revenues - Costs] | ($6,160) | ($5,600) | $560 |
Decision: Sloan should buy the equipment.
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