Question

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.

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 (5 years)
Lease (5 years)
Income (loss)	$	$	$

Answer 1

• All working forms part of the answer
• Requirement

Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
Dec-03
	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$                           -	$                                -	$                      -
Costs:
Purchase price	$                           -	$                  (125,500.00)	$        (125,500.00)
Freight and installation	$                           -	$                      (1,600.00)	$           (1,600.00)
Repair and maintenance (5 years)	$                           -	$                    (12,500.00)	$          (12,500.00)
Lease (5 years)	$             (150,000.00)	$                                -	$         150,000.00
Income (loss)	$             (150,000.00)	$                  (139,600.00)	$           10,400.00

• The Company should BUY Equipment (Alternative 2) because in doing so, it will save cost of $ 10,400 in 5 years.