Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,180. The freight and installation costs for the equipment are $640. If purchased, annual repairs and maintenance are estimated to be $430 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,420 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 owner.) If an amount is zero, enter zero "0". Use a minus sign to 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)	$	$	$

Answer 1

Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
3-Dec
	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	-	-	-
Costs:
Purchase price	-	3,180	(3,180)
Freight and installation	-	640	(640)
Repair and maintenance (4 years) [430 x 4]	-	1,720	(1,720)
Lease (4 years)[1420 x 4]	5,680	-	5,680
Income (Loss)	(5,680)	(5,540)	140	cost saving
	A	B	C = A-B
So revenue would increase by $140, if equipment is purchased instead of leasing.