Ex 25-2 Differential analysis for a lease or buy decision

Norton Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $4,600. The freight and installation costs for the equipment are $590. If purchased, annual repairs and maintenance are estimated to be $620 per year over the four-year useful life of the equipment. Alternatively, Norton can lease the equipment from a domestic supplier for $1,800 per year for four years, with no additional costs. Prepare a differential analysis dated August 4, 2014, to determine whether Norton 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.

Answer:

Differential Analysis 

Lease Equipment (Alt. 1) or Buy Equipment (Alt. 2) 

August 4, 2014 

 

 

Lease 

Equipment 

(Alternative 1) 

Costs:    

Purchase price $ 0 –$4,600 –$4,600 

Freight and installation 0 –590 –590 

Repair and maintenance (4 years) 0 –2,480

Lease (4 years) –7,200I

ncome (Loss) –$7,200 –$7,670 –$   470 

    

1 

$620 × 4 years 

2 

$1,800 × 4 years 

The company should lease the equipment.