Homework SourseSloan Corporation is considering new equipment The equipment
Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,180. The freight and installation costs for the equipment are $640. 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 $1,420 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 zero \"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) | $ | $ | $ |
Solution
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 - 3,180 (3,180) Freight and installation - 640 (640) Repair and maintenance (4 years) [430 x 4] - 1,720 (1,720) Lease (4 years)[1420 x 4] 5,680 - 5,680 Income (Loss) (5,680) (5,540) 140 cost saving A B C = A-B So revenue would increase by $140, if equipment is purchased instead of leasing.
