1 2 3 4 5 6 7 8 9 10 Differential Analysis for a Lease or Sell Decision Inman Co

ID: 2468571 • Letter: 1

Question

Differential Analysis for a Lease or Sell Decision Inman Construction Company is considering selling excess machinery with a book value of $277,500 (original cost of $398,700 less accumulated depreciation of $121,200) for $277,500, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $285,900 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,000 Hide a. Prepare a differential analysis, dated January 3, 2014, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) January 3, 2014 Lease Machinery (Alternative 1 Sell Machinery (Alternative 2 Differential Effect on Income (Alternative 2 Revenues Costs Income (Loss) b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Select

Explanation / Answer

1a.

Differential analysis:

Lease Machinery

Sell Machinery

Differential Effect on net income

(Alt. 1)

(Alt. 2)

Revenues

$ 285,900.00

$ 277,500.00

$ (8,400.00)

Less: Costs

$ (22,500.00)

$ (13,875.00)

$ 8,625.00

(277500*5%)

Income (Loss)

$ 263,400.00

$ 263,625.00

$ 225.00

1b.

On the basis of above data, Alt. 2 (Sell Machinery) gives higher income , hence it is advisable to Sell the machinery.