Question

1. Urban Styles Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,400. The freight and installation costs for the equipment are $620. If purchased, annual repairs and maintenance are estimated to be $390 per year over the four-year useful life of the equipment. Alternatively, Urban Styles can lease the equipment from a domestic supplier for $1,580 per year for four years, with no additional costs.

   Prepare a differential analysis dated December 11 to determine whether Urban Styles 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 Machine (Alt. 1) or Buy Machine (Alt. 2)
   December 11
   	Lease Machine (Alternative 1)	Buy Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues	$0	$0	$0
   Costs:
   Purchase price	$	$	$
   Freight and installation
   Repair and maintenance (4 years)
   Lease (4 years)
   Income (Loss)	$	$	$

   Feedback

   Determine whether Urban Styles should lease (Alternative 1) or buy (Alternative 2) the equipment.
   

   • Lease the equipment
   • Buy the equipment

Answer 1

Solution:

Differential Analysis
Lease Machine (Alt. 1) or Buy Machine (Alt. 2)
Dec-11
	Lease Machine (Alternative 1)	Buy Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$0	$0	$0
Costs:
Purchase price	$0	$3,400	-$3,400
Freight and installation	$0	$620	-$620
Repair and maintenance (4 years)	$0	$1,560	-$1,560
Lease (4 years)	$6,320	$0	$6,320
Income (Loss)	-$6,320	-$5,580	$740

Urban Styles should buy (Alternative 2) the equipment.