Question

Gilroy Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,240. The freight and installation costs for the equipment are $620. If purchased, annual repairs and maintenance are estimated to be $380 per year over the four-year useful life of the equipment. Alternatively, Gilroy can lease the equipment from a domestic supplier for $1,460 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 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.

Answer 1

Gilroy should buy

Step-by-step explanation:

Differential analysis is a decision making method of comparing two or more options to each other in order arrive at the best decision.

Workings

Lease Buying Differential effect

Income 0 0 0

Cost of purchase 3,240 (3240)

Cost of freight 620 (620)

Maintenance 1,520 (1,520)

(380*4)

Lease 5,840 5,840

1460 * 4

Income 5,840 (5380) 460

Gilroy should buy the machine rather than lease as he saves $460 with the buying option