Differential Analysis for a Lease-or-buy Decision

Moffett Industries is considering new equipment. The equipment can be purchased from an overseas supplier for $3,200. The freight and installation costs for the equipment are $660. If purchased, annual repairs and maintenance are estimated to be $410 per year over the 4-year useful life of the equipment. Alternatively, Moffett Industries can lease the equipment from a domestic supplier for $1,480 per year for 4 years, with no additional costs.

Question Content Area

a. Prepare a differential analysis dated February 12 to determine whether Moffett Industries 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".

Line Item Description	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price	$Purchase price	$Purchase price	$Purchase price
Freight and installation	Freight and installation	Freight and installation	Freight and installation
Repair and maintenance (4 years)	Repair and maintenance (4 years)	Repair and maintenance (4 years)	Repair and maintenance (4 years)
Lease (4 years)	Lease (4 years)	Lease (4 years)	Lease (4 years)
Total costs	$Total costs	$Total costs	$Total costs