Answer:
Alternative 2 (purchase equipment) should be selected because it reduces costs by $10,400.
Explanation:
Alternative 1 (lease):
less price per year $30,000 x 5 years = $150,000
Alternative 2 (purchase):
initial investment = $125,500 + $1,600 = $127,100
maintenance cost per year = $2,500 x 5 years = $12,500
<h2>                   Differential Analysis</h2>
                                               alternative 1      alternative 2     differential 
                                               lease                 purchase          effect
Revenues                             $0                      $0                    $0
Costs:    
Purchase price                     $0                -$125,500         -$125,000
Freight and installation      $0                    -$1,600              -$1,600  
Repair and maintenance          $0                   -$12,500           -$12,500
(5 years)    
Lease                                    -$150,000                 $0              $150,000
(5 years)    
Income / loss                       -$150,000           -$139,600           <u>$10,400</u>
Alternative 2 (purchase equipment) should be selected because it reduces costs by $10,400.