Question

Differential Analysis for a Lease or Buy Decision

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丰650. If purchased, annual repairs and maintenance are estimated to be丰430 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,440 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 own er: r amount is zero e ter , use a minus si 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) (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	$3,100	-$3,100
Freight and Installation	$0	$650	-$650
Repairs and maintenance (4 years) [$430 x 4 years]	$0	$1,720	-$1,720
Lease (4 Years) [$1,440 x 4 years]	$5,760	$0	$5,760
Income (Loss)     [Revenues - Costs]	-$5,760	-$5,470	$290

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Decision: Sloan should buy the equipment as the differential income (if alternative 2 is chosen) is $290 (savings).