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In: Accounting

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for...

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) $ $ $

Solutions

Expert Solution

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

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