Question

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.

Answer 1

Answer:

It is cheaper for Laredo to purchase the machine as he saves a sum of  $15,300 through it.

Explanation:

Differential analysis is a system of evaluating the cost and benefits that would arise from alternative solutions to the same problems. The analysis of different options towards a decision making in order to arrive at the best option

Cost of Purchase.

Initial cost  - $120,000

Freight & Installation - $ 1500

Repair & Maintenance - $2200 *6 - $13200

Total -$134,700

Cost of lease = $25,000*6=$150,000

It is cheaper for Laredo to purchase the machine as he saves a sum of  $15,300 through it.