Gilroy Corporation is considering new equipment. The equipment can be purchased

Question

Gilroy Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,200. The freight and installation costs for the equipment are $640. If purchased, annual repairs and maintenance are estimated to be $400 per year over the four-year useful life of the machine. Alternatively, Gilroy can lease the machine from a domestic supplier for $1,400 per year for four years, with no additional costs.

Prepare a differential analysis dated October 3, 2012 to determine whether Gilroy 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 equipment user, as opposed to the equipment owner.) If an amount is zero, enter zero "0".

Lease Machine (Alternative 1)

Costs:

Purchase Price

Freight and Installation

Repair and Maintenance (4 years)

Lease (4 years)

Income (loss)

Buy Machine (Alternative 2)

Costs:

Purchase Price

Freight and Installation

Repair and Maintenance (4 years)

Lease (4 years)

Income (loss)

Differential Income (Alternative 3)

Costs:

Purchase Price

Freight and Installation

Repair and Maintenance (4 years)

Lease (4 years)

Income (loss)

Explanation / Answer

Hi,

Please find the answer as follows:

The equipment should be purchased as it results in less outflow of cash. Thanks.

Thanks

Lease Buy Differential Income Costs


Purchase Price 0 3200 3200 Freight and Installation 0 640 640 Repair and Maintenance (4 years) 0 1600 1600 Lease (4 years) 5600 0 -5600 Income (Loss) 5600 5440 -160

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