Differential Analysis for a Lease or Buy Decision Sloan Corporation is considering new equipment. The equipment can be purchased

Question

3 years ago

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Differential Analysis for a Lease or Buy Decision Sloan Corporation is considering new equipment. The equipment can be purchased

from an overseas supplier for $125,500. The freight and installation costs for the equipment are $1,600. If purchased, annual repairs and maintenance are estimated to be $2,500 per year over the five-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $30,000 per year for five 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 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". Use a minus sign to indicate a loss.

Business

1 answer:

Arlecino [84] · Answer 1 · 2021-12-03T11:34:36+03:00

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.