Costs for Each Alternative
1. Alternative 1: Lease Equipment
- Lease cost per year: $1,580
- Total lease cost over 4 years: \( 1,580 \times 4 = 6,320 \)
2. Alternative 2: Buy Equipment
- Purchase price: $3,220
- Freight and installation: $620
- Annual repairs and maintenance: $430 per year
- Total repairs and maintenance over 4 years: \( 430 \times 4 = 1,720 \)
- Total cost of buying over 4 years: \( 3,220 + 620 + 1,720 = 5,560 \)
Differential Analysis
- Purchase price
- Lease: $0
- Buy: $3,220
- Differential effect: $3,220
- Freight and installation
- Lease: $0
- Buy: $620
- Differential effect: $620
- Repairs and maintenance
- Lease: $0
- Buy: $1,720
- Differential effect: $1,720
- Lease cost (4 years)
- Lease: $6,320
- Buy: $0
- Differential effect: -$6,320
Total Costs
- Total cost for leasing: $6,320
- Total cost for buying: $5,560
- Differential effect (cost saving if buying): $760
Conclusion
Moffett Industries would save $760 over the 4-year period by purchasing the equipment rather than leasing it. Therefore, Moffett Industries should buy the equipment (Alternative 2).
