Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,280. The freight and installation costs for the equipment are $650. If purchased, annual repairs and maintenance are estimated to be $400 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,460 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)	$	$	$ Machine Replacement Decision A company is considering replacing an old piece of machinery, which cost $602,700 and has $350,600 of accumulated depreciation to date, with a new machine that has a purchase price of $483,000. The old machine could be sold for $61,600. The annual variable production costs associated with the old machine are estimated to be $155,500 per year for eight years. The annual variable production costs for the new machine are estimated to be $99,200 per year for eight years. a.1 Prepare a differential analysis dated September 13, to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) September 13 Continue with Old Machine (Alternative 1) Replace Old Machine (Alternative 2) Differential Effect on Income (Alternative 2) Revenues: Proceeds from sale of old machine $ $ $ Costs: Purchase price Variable productions costs (8 years) Income (Loss) $ $ $

The sunk cost is the $.

Answer 1

	Differential Analysis
	Continue with Old Machine (Alternative. 1) or Replace Old Machine (Alternative. 2)
	Sep-13
		Continue with Old Machine	Replace Old Machine	Differential Effect on Income
		(Alternative 1)	(Alternative 2)	(Alternative 2)
	Revenue:
	Proceeds from sale of old machine	0	61600	61600
	Costs:
	Purchase price	0	(483000)	(483000)
	Variable manufacturing costs (8 years)	(1244000)	(793600)	540400
	Total costs	(1244000)	(1276600)	(32600)
	Income (loss)	(1244000)	(1215000)	29000
The company should replace the old machine
The book value of the old machinery is sunk cost as it is irrelevent