Friday, November 9, 2018

Norton Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $4,600

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 
    
$620 × 4 years 
$1,800 × 4 years 
The company should lease the equipment. 

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