Question

Differential Analysis for a Lease-or-Buy Decision

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 $650. If purchased, annual repairs and maintenance are estimated to be $430 per year
over the 4-year useful life of the equipment. Alternatively, Gilroy can lease the equipment from a domestic supplier for $1,580 per
year for 4 years, with no additional costs.
Prepare a differential analysis dated December 11 to determine whether Gilroy should Lease Equipment (Alternative 1) or Buy
Equipment (Alternative 2). 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 "0". For those boxes in which you must enter subtracted or negative
numbers use a minus sign.
Unit costs:
Purchase price
Freight and installation
Repair and maintenance (4 years)
Lease (4 years)
Total unit costs
Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
December 11
Feedback
Lease Equipment
(Alternative 1)
0.00 ✓
-0 ✓
0
6,320 X
6,320 X
Buy Equipment
(Alternative 2)
3,200 X
650 X
Differential Effects
(Alternative 2)
Alpha-numeric input field
Check My Work
Compare the lease costs for 4 years with the buying costs for 4 years (purchase price, freight, and maintenance). Determine
the differential effect on income of the revenues, costs, and income (loss) by subtractifig alternative 1 from alternative 2.
Determine whether Gilroy should lease (Alternative 1) or buy (Alternative 2) the equipment.

Answer 1

After a differential analysis, it is determined that it would cost Gilroy Corporation $750 more to lease the equipment over 4 years than to buy it. Thus, it is more economical for Gilroy to purchase the equipment.

Step-by-step explanation:

Differential Analysis for Lease or Buy Decision

To determine whether Gilroy Corporation should lease or buy the equipment, we need to conduct a differential analysis that compares the total costs over the 4 years for both alternatives.

Buying the equipment entails an initial purchase price of $3,200, adding freight and installation costs of $650, and annual repair and maintenance costs of $430 over 4 years, which amounts to $1,720 ($430 x 4). Therefore, the total cost to buy is $3,200 + $650 + $1,720 = $5,570.

Leasing the equipment would cost Gilroy Corporation $1,580 per year for 4 years, which totals $6,320 ($1,580 x 4) with no additional costs.

Comparing the two options:

• Lease Equipment (Alternative 1): $6,320
• Buy Equipment (Alternative 2): $5,570

The differential effect on income when subtracting Alternative 1 from Alternative 2 is $6,320 - $5,570 = $750. Since this amount is positive, it indicates that leasing is more expensive by $750 over the 4-year period compared to buying.

Therefore, based on this analysis, it would be more economical for Gilroy to buy the equipment.