Question

Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,120. The freight and installation costs for the equipment are $600. If purchased, annual repairs and maintenance are estimated to be $400 per year over the four-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $1,360 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".

Answer 1

Answer:

See below.

Explanation:

We first calculate total costs for the purchase and lease.

Purchase = $3,120 + 600 + (400 * 4) = $5320

Lease cost for 4 years = $1,360 * 4 = $5,440

Differential analysis indicates a $120 more payment when the equipment is leased.

Although this puts the total cost over the 4 years of lease higher than the purchase, it must be noted that lease is annual and a lump sum is not needed where as although the purchase gives you an asset, the savings on tying up the cash in purchase may be able to be used else where more profitably thus a lease seems more viable specially when present value of money would be taken in to account.

Hope that helps.