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 $3,100. The freight and installation costs for the equipment are $660. If purchased, annual repairs and maintenance are estimated to be $380 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,340 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.

Answer 1

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	$3100	$0	$3100
Freight and installation	660	0	660
Repair and maintenance (4 years)	1520	0	1520
Lease (4 years)	0	5360	(5360)
Income (loss)	$5280	$5360	($80)

Sloan should lease (Alternative 1).