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Differential Analysis for a Lease or Buy Decision D’Amato Corporation is considering new equipment. The equipment...

Differential Analysis for a Lease or Buy Decision

D’Amato Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $315,000. The freight and installation costs for the equipment are $15,000. If purchased, annual repairs and maintenance are estimated to be $12,000 per year over the four-year useful life of the equipment. Alternatively, D’Amato can lease the equipment from a domestic supplier for $95,000 per year for four years, with no additional costs.

Prepare a differential analysis dated December 11, to determine whether D’Amato 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 "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
December 11
Lease Equipment
(Alternative 1)		 Buy Equipment
(Alternative 2)		 Differential Effect
on Income
(Alternative 2)
Revenues $0 $0 $0
Costs:
Purchase price $ $
Freight and installation
Repair and maintenance (4 years)
Lease (4 years)
Income (Loss) $ $ $

Determine whether D’Amato should lease (Alternative 1) or buy (Alternative 2) the equipment.

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Homework Answers

Answer #1
Differential Analysis
Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2)
11-Dec
Lease Equipment Buy Equipment Differential Effect
(Alternative 1) (Alternative 2) on Income
(Alternative 2)
Revenues $0 $0 $0
Costs:
Purchase price -315000 -315000
Freight and installation -15000 -15000
Repair and maintenance (4 years) -48000 -48000
Lease (4 years) -380000 380000
Income (Loss) -380000 -378000 2000
Buy (Alternative 2) the equipment
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