Question

Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,831. The freight and installation costs for the equipment are $554. If purchased, annual repairs and maintenance are estimated to be $415 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,745 per year for four years, with no additional costs.

Required:
a. Prepare a differential analysis dated December 3 to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon () will automatically appear if required. (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.)
b. Determine whether the Sloan should lease (Alternative 1) or purchase (Alternative 2) the equipment.

Answer 1

Alternative 1 Alternative 2 Differential

Lease Buy Amount

Purchase cost $0 $3,831 ($3,831)

Freight and $0 $554 ($554)

installation costs

Annual repairs and $0 $1,660 ($1,600)

maintenance costs

Lease costs $6,980 $0 $6,980

Total costs $6,980 $6,045 $935

The equipment should be purchased instead of leased because the costs of purchasing and maintenance costs are lower than lease costs.

Step-by-step explanation:

A differential analysis is carried out to determine whether alternative projects' revenues and costs are higher. This way you can determine which project or investment costs less or generates higher profits.