Answer:
$8
Explanation:
An American style call option has a strike price of $35
The underlying stock now sells for $43 in the market
The call premium is $12
Therefore, the intrisic value of the call can be calculated as follows
Intrisic value= Market price - strike price
= $43-$35
= $8
Hence the intrinsic value of the call is $8
Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 25%. Ignatius would report the following EPS data (rounded) on its net income of $20 million: Basic EPS Diluted EPS a. $ 2.77 $ 2.67 b. $ 2.81 $ 2.73 c. $ 2.85 $ 2.67 d. $ 2.81 $ 2.68
Answer:
Ignatius Corporation
Basic and Diluted EPS are:
c. $ 2.85 $ 2.67
Explanation:
Data and Calculations:
Common stock outstanding = 7 million shares
Issued 10,000, $1,000 convertible bonds = $10,000,000
Convertible bonds = 10,000 bonds = 500,000 shares (10,000 x 50)
Interest payment = semiannual at 10% per annum
6%, 100,000 Cumulative preferred stock at $100 par = $10,000,000
Preferred dividend = $600,000
Net Income of $20 million
Basic EPS = $20,000,000/7,000,000 = $2.857 per share
Diluted EPS = $20,000,000/7,500,000 = $2.67 per share
To obtain the diluted EPS, the outstanding common stock is increased by the number of potential convertible bonds.
Fremont Enterprises has an expected return of and Laurelhurst News has an expected return of . If you put of your portfolio in Laurelhurst and in Fremont, what is the expected return of your portfolio?
The question is incomplete as it is missing the figures. The complete question is,
Fremont Enterprises has an expected return of 15% and Laurelhurst News has an expected return of 20%. If you put 70% of your portfolio in Laurelhurst and 30% in Fremont, what is the expected return of your portfolio?
Answer:
Portfolio return = 0.185 or 18.5%
Explanation:
The expected return of a portfolio is a function of the weighted average of the individual stocks returns' that form up the portfolio. The expected return of a portfolio can be calculated using the following formula,
Portfolio return = wA * rA + wB * rB + ... + wN * rN
Where,
w represents weight of each stock in the portfolior represents the return of each stock in the portfolioPortfolio return = 0.3 * 0.15 + 0.7 * 0.2
Portfolio return = 0.185 or 18.5%
Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2021. At January 1, CSI reported an inventory of $153,000. Sales from January 1, 2021, to August 5, 2021, totaled $432,000 and purchases totaled $175,500 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:
Answer:
58,500
Explanation:
Given the information above, the formula for Inventory loss is
Inventory loss = Opening inventory + Purchases - Cost of sales
Where,
Cost of sales = $432,000 × 100 ÷ 160
=$270,000
Since opening inventory = $153,000
Purchases = $175,500
Therefore,
Inventory loss = $153,000 + $175,500 - $270,000
= $58,500
he beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock were:
Answer:
Arithmetic average rate of return = 9.30%
geometric average annual rate of return = 8.58%
Explanation:
share price at the beginning = $50
time = 3 year
price at the end of year 1 = $62
price at the end of year 2 = $58
price at the end of year 3 = $64
Annual rate of return in year 1 = ($62 / $50 - 1) x 100 = 24%
Annual rate of return in year 2 = ($58 / $62 - 1) x 100 = -6.45%
Annual rate of return in year 3 = \($64 / $58 - 1) x 100 = 10.34%
Arithmetic average rate of return = sum of annual rate of return / 3
Arithmetic average rate of return = (24% + -6.45% + 10.34%) / 3
Arithmetic average rate of return = 9.30%
geometric average annual rate of return = { (1 + r1) x (1 + r2) x (1 + r3) }^1/3 - 1
= (1.24) x (0.9355) x (1.1034)^1/3 - 1 = 8.58%
Mr. Green contracts with Mr. Brown to repair his roof. Mr. Brown is about 75% done when the deadline of the contract occurs. Which legal standard would prevent Mr. Brown from being considered to be in breach of his agreement with Mr. Green?
Answer:
Substantial performance standard
Explanation:
Substantial performance standard refers to the legal standard in which the good and faith attempt is made so that the requirements of the contract or agreement could be performed
even if is not meet the requirements so we assume that the performance should be completed if its main motive is fulfilled
Therefore in the given case, the substantial performance standard is the correct option that fits to the situation
Businesses should test data storage procedures periodically to ensure that backed up data is correct and complete, and that the storage media or cloud-based storage service works properly.
A) True
B) False
Answer:
True
Explanation:
Data security is very important for a business. The business generates, Collects and processes the available data, which incur huge expenses. To protect this data management should place some internal control within the organization. Backing up the data is also a control to protect the organization's data.
The test of storage procedure should be in place in order to strength of internal control. So, it is true to test data storage procedures periodically to ensure that backed up data is correct and complete, and that the storage media or cloud-based storage service works properly.
Which of the following is true regarding warranties under common law? Select one: A. Express warranties, the implied warranty of assignability, and warranties of title arise automatically under common law. B. Only the implied warranty of merchantability arises automatically under common law. C. Only warranties of title arise automatically under common law. D. For a warranty to exist, it must first be requested by the buyer. E. Only the implied warranty of assignability arises automatically under common law.
Answer: E. Only the implied warranty of assignability arises automatically under common law
Explanation:
Implied warranty is a term that is used in common law to refer to assurance that are given to a a product that the said product is fit and in good condition for the purpose it'll be used for.
Of all the options that are given, the one that is true regarding warranties under common law is that only the implied warranty of assignability arises automatically under common law.
Based on a predicted level of production and sales of 22,000 units, a company anticipates total variable costs of $99,000, fixed costs of $30,000, and operating income of $36,000. Based on this information, the budgeted amount of fixed costs for 20,000 units would be:
Answer:
Budgeted amount of fixed cost for 20,000 units = $30,000
Explanation:
For 22,000 units, Budgeted fixed cost was $30,000
Thus, since fixed cost do not change in totality under ordinary circumstances, the same amount of fixed cost would be budgeted for 20,000 units as well
Based on the information given, the budgeted amount of fixed costs for 20,000 units would be $30,000.
What is a budget?A budget simply means a financial plan that is used by an individual, business organization or government to estimate the amount of revenue and expenditures over a specified period of time, and it is usually on an annual basis i.e one year.
In this scenario, the budgeted amount of fixed costs for 20,000 units would be equal to $30,000 because fixed cost remains the same and doesn't change under ordinary circumstances.
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During August, Boxer Company sells $348,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 5% of the selling price. The warranty liability account has a credit balance of $11,000 before adjustment. Customers returned merchandise for warranty repairs during the month that used $7,600 in parts for repairs. The entry to record the estimated warranty expense for the month is:
Answer:
Dr Estimated Warranty Liability $8,600
Cr Spare Parts Inventory $8,600
Explanation:
The estimated warranty claim is worth $7,600 which means that the warranty claim must be debited by this amount as it was previously forecasted to be at $11,000 and in this month, the claim was worth $7,600. So decrease in warranty liability is necessary. Furthermore, the Spare Parts Inventory would be credited as the Spare parts would be used to fix the inventory which must be of $7,600 in value.
The double entry to record Warranty Repairs would be as under:
Dr Estimated Warranty Liability $8,600
Cr Spare Parts Inventory $8,600
A stock has had returns of 12 percent, 19 percent, 21 percent, −12 percent, 26 percent, and −5 percent over the last six years. What are the arithmetic and geometric average returns for the stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
Average rate of return= 10.17 %
Geometric return = 9.23%
Explanation:
Geometric average return
This is compounded annual rate of return which is used to measure the performance of an asset over a certain number of years. It helps to measure the return generated by an investment taking into account the volatility .
Unlike the arithmetic average the geometric average gives an idea of the real rate taking into account of volatility
The formula below
Geometric Return =(1+r1) (1+r2) ...... (1+rn)^1/n
Geometric Average return =
(1.12× 1.19× 1.21× 0.88× 1.26× 0.95)^(1/6) - 1 =0.09233168
Geometric return =0.0923 × 100= 9.23%
Geometric return = 9.23%
Average rate of return
The average return is the sum of the returns over the years dividend by the Numbers of returns
Average return = sum of return / No of returns
(12% + 19% + 21% + (12%) + 26% + (5%))/6 =10.17 %
Average rate of return= 10.17 %
Geometric return = 9.23%
Which of the following types of decisions involves deciding whether to perform a particular activity in-house or purchase it from an outside supplier?
A. Special-order
B. Make-or-buy
C. Continue or discontinue
D. Sell-or-process further
Answer: Make-or-buy
Explanation:
The decision that involves deciding whether to perform a particular activity in-house or purchase it from an outside supplier is regarded to as the Make-or-buy.
A company can decide to purchase a particular activity when it sees that it's cheaper or when the company wants to focus on other aspects of production.
Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on whether to expand?
Answer:
variable and opportunity costs
Explanation:
In simple words, whenever an organisation is planning to expand into new market they should taken into account only those costs which will increase or decrease due to such operations success or failures, therefore, sunk costs would be irrelevant.
Variable cost refers to the cost that increase or decrease with level of operations while opportunity costs relates to the cost profits foregone due to choosing best alternative over second best alternative.
Claudia is hired as a Senior Engineer by Hexagon Inc. Allen, the HR Manager of the company, promises her that she will start working on live projects within three months from joining. He also tells her that she is expected to give three months' notice before quitting the job. Which of the following statements is true of the given scenario?
a. Claudia is an at-will employee.
b. Allen has violated an employment law by making a promise.
c. Claudia has an implied contract with the company.
d. Hexagon Inc. cannot be challenged in a court even when it fails to follow up on its promises.
Answer:
d. Hexagon Inc. cannot be challenged in a court even when it fails to follow up on its promises.
Indicate whether each of the following statements is true or false.a. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000.b. A company that has received NSF checks should report these checks as a current liability on the balance sheet.c. Restricted cash that is a current asset is reported as part of cash and cash equivalents.d. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.
Answer:
Indication of whether each of the following statements is true or false:
a. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000.
True
b. A company that has received NSF checks should report these checks as a current liability on the balance sheet.
False
c. Restricted cash that is a current asset is reported as part of cash and cash equivalents.
False
d. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.
True
Explanation:
a. Cash and cash equivalents do not include refund due from customers.
b. NSF checks mean that the checks were returned by the bank to the company marked "Not Sufficient Funds." These checks are to be returned to the customers. The customers' accounts will be debited to reverse the earlier recorded payment offsetting their accounts. They are, therefore, not to be recorded as liabilities.
c. Since restricted cash is not available for general and immediate use by the company, it is not part of the cash and cash equivalents. The cash and cash equivalents deal with cash and near cash items that can easily be converted into cash and used in settlement of financial obligations.
d. This is while only marketable securities (bonds, shares, etc) are included in cash and cash equivalents, because most of them have a duration of less than 3 months. Stock investments, without any qualification, do not qualify to be classified as cash and cash equivalents, unless they are held as marketable securities.
An investor purchases a 15-year, $1,000 par value bond that pays semiannual interest of $50. If the semiannual market rate of interest is 6%, what is the current market value of the bond
Answer:
The answer is $862.35
Explanation:
Explanation:
This is a semiannual paying coupon, meaning interest are paid twice in year.
N(Number of periods) = 30periods ( 15 years x 2)
I/Y(Yield to maturity) = 6 percent
PV(present value or market price) = ?
PMT( coupon payment) = $50
FV( Future value or par value) = $1,000.
We are using a Financial calculator for this.
N= 30; I/Y = 6; PMT = 50; FV= $1,000; CPT PV= -862.35
Therefore, the market price of the bond is $862.35.
The current account is best defined as:______.
a. the national income account that tracks all purchases made by businesses within the last six months.
b. the account that includes transactions like imports and exports, income earned by Americans abroad, and net transfers to other countries.
c. the account that tracks the flow of domestic money into and out of foreign assets and the flow of foreign money into and out of domestic assets.
Answer: The account that includes transactions like imports and exports, income earned by Americans abroad, and net transfers to other countries.
Explanation:
A current account can be defined as an account that record the different transactions a country carries out with another country. A current account comprises of net primary income, earnings from foreign investors that have occurred within a particular period of time.
Almost all countries are involved in trading of goods and services with another country, a current account helps to evaluate the manner in which a particular country traded their different goods with foreign markets.There tends to be a postive balance of a country exports more goods than it imports.
Explanation:
A project requires an initial investment of $10 million today. If the cost of capital exceeds the project IRR, then the project must have a(n):
Answer:
Negative NPV.
Explanation:
present value of cost exceeds present value of revenue that is been assumed in the investment plan of the said company/firm.
Net Present Value describes one of the discounted techniques of cash flow used in capital budget to determining the viability of a project or an investment. It is seen to have a huge difference between the present flow of the firms; which is cash inflows and the present value of cash outflows over a period of time. Experts has tagged its primary advantage to be that it is seen to considers the concept of the time value of money.
George Hansen is General Manager for the Marigold Inn in Augusta, Georgia. Sharon Coombs is Restaurant and Food Services manager for the Inn. She reports to George. Two years ago, Sharon noticed a decline in room service business, the highest margin potion of her operation. This decline coincided with an increase in the national sales of pizza delivery and carryout firms as well as an increase in the number of empty pizza boxes from these firms being left in guest rooms in the Inn. Her immediate response was to install a pizza oven in the kitchen and offer room service pizza to guests. The effort met with modest success, though it was well below her expectations. Questionnaires completed by departing guests revealed a problem of product quality.
Focusing on this problem, Sharon improved the Inn’s pizza until blind tests judged it at least equal in quality to the products of the two major pizza delivery competitors in Augusta. Sales did not improve, convincing Sharon that the problem was a perceived mismatch between the hotel’s image and guests’ expectations of pizza makers. Guests simply did not seem to believe that the traditional steak and seafood restaurant at the Inn could make a high-quality, authentic pizza.
Based on this conclusion, Sharon presented the following proposal to George:
"Sales of room service pizza are stagnant due to guests’ misperception that our product is lower in quality than that of competitors. This misperception is based on the belief that until we disassociate our pizza from the Marigold Inn name. Therefore, to capture more room service pizza business, we should create a ‘Napoli Pizza’ image for our guest room delivery service by:
Preparing ‘Napoli Pizza’ brochures for each guest room, complete with a phone number with a prefix different from that of Marigold Inn. The number will reach a special phone in room service, which will be answered, ‘Napoli Pizza, authentic Italian pizza from old, family recipes.’
Using special ‘Napoli Pizza’ boxes for delivering room service pizza to guests.
Issuing ‘Napoli Pizza’ hats and jackets to room service personnel for use in pizza delivery. Room service waiters and waitresses will wear these garments to deliver pizza. They will change to their regular uniforms for other deliveries.
Answer:
Correct Answer:
1. Preparing ‘Napoli Pizza’ brochures for each guest room, complete with a phone number with a prefix different from that of Marigold Inn. The number will reach a special phone in room service, which will be answered,
Explanation:
This is the best logical suggestion to George because, the guests already had the impression that, the inn cannot be able to produce a very high quality and tasty pizza. Preparing "Napoli Pizza" with different information from the Inn is best alternative. the guest would believe that, the pizza is coming from another quality pizza making company.
Brandt Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm?
Answer:
$61.03
Explanation:
The decision tree is a flow like chart which enables to identify the best decision based on the possible probabilities of multiple events. The technique of decision tree is used when there are various options. Every decision is placed on the node of the leaf. These nodes are assigned a probability which makes it easy for the managers to take decision.
In the given scenario the CFO of Brandt Enterprises has created a decision tree as with probabilities 20% of $800, 60% of $520 and 20% of $200 in the year . The NPV estimate is $46.57 for all the probabilities. The firm will have to incur $61.03 to abandon at year 1 .
_________________ agreements are one way to achieve the goal of swapping skills and technologies that each company in a strategic alliance covets, and ensuring a chance for equitable gain.
A. Join venture
B. Sharing
C. Cross-licensing
D. Learning
E. Contractual
Answer:
it should be C. cross-licensing
The health care workforce during the current market-driven changes is experiencing: A. Significant expansion at professional levels B. Experimentation and variation in staffing C. Continued stability in numbers and staffing patterns D. Substantial reductions
Answer:
A. Significant expansion at professional level.
Explanation:
The hospitals provide health care facilities to the public. It is crucial place where one mistake by a doctor or other staff could lead to death of a patient. The patients coming in he hospital need to be treated carefully and timely. The professional and experience will have the skills and expertise to treat the patient carefully and diagnose the problem quickly. There are increased number of professional today than in the previous years. The education has now become more common and people understand the importance of gaining technical education before practical experiments.
"In the long-run, monopolistically competitive firms: have excess capacity. produce at the minimum of average total cost. charge prices equal to marginal cost. both B and C are true."
Answer:
The correct answer is the option D: Both B and C are true.
Explanation:
To begin with, a monopolistically competitive firms is the one that produces in a market in where the other companies sell a pretty similar but different product and there are a lot of buyers so the most important way to difference themself is by the publicity or the identification of the brand in the mind of the consumers. Moreover, in this type of market in the long-run equilibrium the price if equal to the marginal cost and also to the minimun of the average total cost so therefore that it is said that there are zero economic profit
General Electric (GE) has earnings per share of $2.98 and dividends per share of $0.35. Its return on assets (ROA) is 14.6% and its return on equity (ROE) is 18.2%. What is its sustainable rate of growth?
Answer:
g = 0.1606 or 16.06%
Explanation:
The sustainable growth rate is the growth rate in earning or dividends of a stock that will remain constant in the long run. Such a rate is calculate for an indefinite period of time. The formula to calculate the sustainable growth rate is,
g = RR * ROE
Where,
RR is the retention ratio or (1 - dividend payout ratio)ROE is the return on equityThe dividend per share as a percentage of earnings per share will give us the dividend payout ratio.
Dividend payout ratio = 0.35 / 2.98 = 0.1174 or 11.74%
g = (1 - 11.74%) * 18.2%
g = 0.1606 or 16.06%
You are in the business of making kombucha tea. Your variable costs to produce each bottle is $1. Your fixed costs are $100,000/year and you expect to sell 300,000 bottles in your first year. How many bottles must you sell at $3/bottle to cover your fixed costs and earn your target profit of $100,000
Answer:
Break-even point in units= 100,000 units
Explanation:
Giving the following information:
Your variable costs to produce each bottle is $1.
Your fixed costs are $100,000/year.
How many bottles must you sell at $3/bottle to cover your fixed costs and earn your target profit of $100,000
To calculate the number of units to be sold, we need to use the following formula:
Break-even point in units= (fixed costs + desired profit)/ contribution margin per unit
Break-even point in units= (200,000) / (3 - 1)
Break-even point in units= 100,000 units
The number of bottles that must be sold at $3 per bottle to earn a target profit of $100,000 is 200,000 bottles.
Data and Calculations:
Variable cost per bottle = $1
Fixed cost per year = $100,000
Expected sales units in the first year = 300,000 bottles
Selling price per bottle = $3
Target profit = $300,000
Contribution margin per unit = $2 ($3 - $1)
Contribution margin ratio = 67% ($2/$3 x 100)
Sales units to achieve target profit = (Fixed Costs + Profit)/$2
= ($100,000 + $300,000)/$2
= 200,000 bottles
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In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximizing its tax revenue from the sale of these products? Explain your answer
Answer:
I am sorry I don't know sorry again
Which of the following statements would best characterize someone who is not culturally competent in working with others from different cultures?a. The person varies the rate of their speaking.b. The person uses facial expressions when communicating.c. The person pays attention to verbal and non-verbal behavior.d. The person fills "silence" during conversations.
Answer: The person fills "silence" during conversations
Explanation:
Culture is simply regarded as people's way of life. The way if life include their food, the kind of music they listen to, their religion, language, their beliefs, values etc.
Someone who is not culturally competent in working with others from different cultures would usually be silent during conversations. This is because the person doesn't know much about the culture and can't really be involved in the conversation.
A stock has had the following year-end prices and dividends: Year Price Dividend 1 $ 43.37 - 2 48.35 $ .60 3 57.27 .63 4 45.35 .80 5 52.27 .85 6 61.35 .93 What are the arithmetic and geometric average returns for the stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
geometric mean return = 1.2%
arithmetic mean return = 1.21%
Explanation:
Year Price Dividend Yearly return
1 $43.37 - 0
2 $48.35 $0.60 1.24%
3 $57.27 $0.63 1.1%
4 $45.35 $0.80 1.76%
5 $52.27 $0.85 1.63%
6 $61.35 $0.93 1.52%
geometric mean return = [(1 + 0) x (1 + 0.0124) x (1 + 0.011) x (1 + 0.0176) x (1 + 0.0163) x (1 + 0.0152)]¹/⁶ - 1 = 1.012 - 1 = 0.012 = 1.2%
arithmetic mean return = (0% + 1.24% + 1.1% + 1.76% + 1.63% + 1.52%) / 6 = 7.25% / 6 = 1.21%
Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company’s products, a football helmet for the North American market, requires a special plastic. During the quarter ending June 30, the company manufactured 3,600 helmets, using 2,664 kilograms of plastic. The plastic cost the company $20,246. According to the standard cost card, each helmet should require 0.65 kilograms of plastic, at a cost of $8.00 per kilogram. Required: 1. What is the standard quantity of kilograms of plastic (SQ) that is allowed to make 3,600 helmets? 2. What is the standard materials cost allowed (SQ × SP) to make 3,600 helmets? 3. What is the materials spending variance? 4. What is the materials price variance and the materials quantity variance?
Answer and Explanation:
The computation is shown below;
1. The Standard quantity of kilogram for making 3,600 helmets is
= Number of helmets × number of kilograms required
= 3,600 × 0.65
= 2,340
2. The standard material cost is
= Standard quantity × standard price
= 2,340 × $8
= $18,720
3. Material spending variance is
= Plastic cost - standard material cost
= $20,246 - $18,720
= $1,526 unfavorable
4. The material price and quantity varaince is
Price variance
= Plastic cost - (number of plastic × cost)
= $20,246 - (2,664 × $8)
= $1,066 favorable
Quantity variance
= Standard Cost × (Actual quantity - standard quantity)
= $8 × (2,664 - 2,340)
= $2,592 unfavorable
If the Fed increases ior enough, such that it will raise the intersection point with the vertical portion of reservesupply, then the equilibrium fed funds rate will:_________
Answer: Increase
Explanation:
Based on the above scenario given in the question whereby when the Fed increases ior enough, such that it will raise the intersection point with the vertical portion of reservesupply, then the equilibrium fed funds rate will increase.
There'll be a rise in the equilibrium fed funds since the intersection point has been raised.
Sloan Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,040. The freight and installation costs for the equipment are $610. If purchased, annual repairs and maintenance are estimated to be $420 per year over the four-year useful life of the equipment. Alternatively, Sloan can lease the equipment from a domestic supplier for $1,460 per year for four years, with no additional costs. Prepare a differential analysis dated December 3, to determine whether Sloan should lease (Alternative 1) or purchase (Alternative 2) the machine. (Hint: This is a "lease or buy" decision, which must be analyzed from the perspective of the machine user, as opposed to the machine owner.) If an amount is zero, enter "0". Use a minus sign to indicate a loss.
Answer:
Sloan Corporation
Differential Analysis:
Cost of Alternative 1 (Lease) - $1,460.00
Cost of Alternative 2 (Buy) = $1,332.50
Choose Alternative 2, purchase the equipment, and there will be a cost saving of $127.50 per year.
Explanation:
Buy Decision:
Cost of purchase = $3,040
Freight-in 610
Total cost $3,650
Annual equipment cost = $912.50
Annual Repair cost = 420.00
Total annual cost to buy = $1,332.50
Cost of Lease per year = $1,460
Sloan Corporation's differential analysis of the lease or buy decision shows that it would be more profitable to purchase the equipment than to lease. With a purchase decision, the cost savings will be $127.50 per year. By undertaking this differential analysis, Sloan Corporation is able to determine the alternative that will serve its best interest, especially in terms of cost.