Differential Analysis for a Lease or Buy Decision Sloan Corporation is consideri

Question

Differential Analysis for a Lease or Buy Decision Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $125,500. The freight and installation costs for the equipment are $1,600. If purchased, annual repairs and maintenance are estimated to be $2,500 per year over the five-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $30,000 per year for five 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 equipment. 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 "o". Use a minus sign to indicate a loss. Differential Analysis Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2) December 3 Lease Equipment (Alternative1) Buy Equipment (Alternative 2) Differential Effect on Income (Alternative 2) Costs: Freight and installation Repair and maintenance (5 years) Lease (5 years) Income (Loss) Determine whether Carr should lease (Alternative 1) or buy (Alternative 2) the equipment.

Explanation / Answer

Carr should Buy equipment as it will save $ 10400

Lease equipment Buy equipment Differential effect on Income Revenue 0 0 0 cost Purchase price 0 -125500 125500 Freight and installation 0 -1600 1600 Repair 0 -12500 [2500*5] 12500 Lease 30000*5=-150000 0 -150000 Income(loss) -150000 -139600 -10400

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