Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,160. The freight and installation costs for the equipment are $660. 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 $1,400 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 "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	$             -	$      (3,160)	$      (3,160)
Freight and installation	$             -	$         (660)	$         (660)
Repair and maintenance (4 years)	$             -	$      (1,720)	$      (1,720)
Lease (4 years)	$      (5,600)	$             -	$        5,600
Income (loss)	$      (5,600)	$      (5,540)	$             60
The company should buy the equipment.