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

Answer:

Gilroy should buy

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