Differential Analysis for a Lease or Buy Decision
Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,100. The freight and installation costs for the equipment are $650. If purchased, annual repairs and maintenance are estimated to be $420 per year over the four-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $1,500 per year for four years, with no additional costs.
Prepare a differential analysis dated March 15 to determine whether Laredo Corporation 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 "0".
Differential Analysis | |||
Lease (Alt. 1) or Buy (Alt. 2) Equipment | |||
March 15 | |||
Lease Equipment (Alternative 1) |
Buy Equipment (Alternative 2) |
Differential Effects (Alternative 2) |
|
Costs: | |||
Purchase price | $ | $ | $ |
Freight and installation | |||
Repair and maintenance (4 years) | |||
Lease (4 years) | |||
Total costs | $ | $ | $ |
Determine whether Laredo should lease (Alternative 1) or buy
(Alternative 2) the equipment.
Lease Equipment (Alternative 1) |
Buy Equipment (Alternative 2) |
Differential Effects (Alternative 2) |
|
Costs: | |||
Purchase price | $0 | $3,100 | $3100 |
Freight and installation | 0 | 650 | 650 |
Repair and maintenance (4 years) | 0 |
1,680 (420*4) |
1680 |
Lease (4 years) |
6,000 (1500*4) |
0 | -6000 |
Total costs | $6,000 | $5,430 | -$570 |
Determine whether Laredo should lease (Alternative 1) or buy (Alternative 2) the equipment.
Laredo should BUY the equioment as it would result in coat savings.
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