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.
