Question

Lease or Sell

Plymouth Company owns equipment with a cost of $600,000 and accumulated depreciation of $375,000 that can be sold for $300,000, less a 4% sales commission. Alternatively, Plymouth Company can lease the equipment for four years for a total of $320,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Plymouth Company on the equipment would total $40,000 over the four-year lease.

a. Prepare a differential analysis on August 7 as to whether Plymouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
August 7
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$	$	$
Costs
Profit (Loss)	$	$	$

b. Should Plymouth Company lease (Alternative 1) or sell (Alternative 2) the equipment?

Answer 1

a)

Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
August 7
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$320000	$300000	-$20000
Costs	-40000	-12000*	28000
Profit (Loss)	$280000	$288000	$8000

*300000*4%

b) Plymouth Company should sell the equipment as net gain from selling is $8000.