Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,220. The freight and installation costs for the equipment are $650. If purchased, annual repairs and maintenance are estimated to be $390 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 "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)
December 3
	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	0	0	0
Costs:
Purchase price	0	-3220	-3220
Freight and installation	0	-650	-650
Repair and maintenance (4 years)	0	-1560	-1560
Lease (4 years)	-5680	0	5680
Income (loss)	-5680	-5430	250
The company should buy the Equipment
Alternatively costs can be written without a minus sign:
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	0	0	0
Costs:
Purchase price	0	3220	-3220
Freight and installation	0	650	-650
Repair and maintenance (4 years)	0	1560	-1560
Lease (4 years)	5680	0	5680
Income (loss)	-5680	-5430	250