Differential Analysis for a Lease or Buy Decision
Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $120,000. The freight and installation costs for the equipment are $1,500. If purchased, annual repairs and maintenance are estimated to be $2,200 per year over the six-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $25,000 per year for six years, with no additional costs.
Prepare a differential analysis dated March 15 to determine whether Laredo Corporation should lease (Alternative 1) or purchase (Alternative 2) the equipment. (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). If an amount is zero, enter "0".
Differential Analysis | |||
Lease (Alt. 1) or Buy (Alt. 2) Equipment | |||
March 15 | |||
Lease Equipment (Alternative 1) |
Buy Equipment (Alternative 2) |
Differential Effects (Alternative 2) |
|
Costs: | |||
Purchase price | $ | $ | $ |
Freight and installation | |||
Repair and maintenance (6 years) | |||
Lease (6 years) | |||
Total costs | $ | $ | $ |
for formulas and calculations, refer to the image below
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