Question

1. Boxx Corporation is considering the acquisition of new equipment. The equipment can be purchased from an overseas supplier for $8,500. The freight and installation costs for the equipment are $645. If purchased, annual repairs and maintenance are estimated to be $465 per year over the five-year useful life of the equipment. Alternatively, Boxx can lease the equipment from a domestic supplier for $2,200 per year for five years, with no additional costs.

Required:

1. Prepare a differential analysis to determine whether Boxx should lease (Alternative 1) or purchase (Alternative 2) the equipment.

2. Indicate specifically whether the company should lease or buy the equipment after completing the analysis. Explain. 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.

Answer 1

Solution 1:

Differential Analysis - Boxx Corporation
Lease Equipment (Alt 1) or Purchase Equipment (Alt 2)
Particulars	Lease Equipment (Alt 1)	Buy Equipment (Alt 2)	Differential effect on income (Alt 2)
Purchase cost	$0.00	$8,500.00	-$8,500.00
Freight and insatllation	$0.00	$645.00	-$645.00
Annual repair and maintenance	$0.00	$2,325.00	-$2,325.00
Annual lease rent	$11,000.00	$0.00	$11,000.00
Total cost	$11,000.00	$11,470.00	-$470.00

Solution 2:

As there is net financial disadvantage of $470 on buying the equipment, therefore compnay should lease the equipment.