Question

D’Amato Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,745. The freight and installation costs for the equipment are $474. If purchased, annual repairs and maintenance are estimated to be $407 per year over the four-year useful life of the equipment. Alternatively, D’Amato can lease the equipment from a domestic supplier for $1,701 per year for four years, with no additional costs.

	Required:
A.	Prepare a differential analysis dated December 11 to determine whether D’Amato 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 D’Amato should lease (Alternative 1) or purchase (Alternative 2) the equipment.

Answer 1

A

Lease charges per year = $1,701

Lease charges for 4 years = Lease charges per year x 4

= 1,701 x 4

= $6,804

Repairs and maintenance cost per year = $407

Repairs and maintenance cost for 4 years =  Repairs and maintenance cost per year x 4

= 407 x 4

= $1,628

Differential analysis

	Lease	Purchase	Increase/Decrease in income
Revenues	0	0	0
Costs:
Purchase price of equipment	0	- 3,745	- 3,745
Freight and installation costs	0	- 474	- 474
Repairs and maintenance costs	0	- 1,628	- 1,628
Lease charges	- 6,804	0	6,804
Net income	- $6,804	- $5,847	$957

Financial advantage of buying equipment = $957

B.

D’Amato should buy the equipment