Question

Differential Analysis for a Lease or Sell Decision

Granite Construction Company is considering selling excess machinery with a book value of $279,100 (original cost of $400,100 less accumulated depreciation of $121,000) for $274,900, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $286,400 for five years, after which it is expected to have no residual value. During the period of the lease, Granite Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,300.

a. Prepare a differential analysis, dated November 7 to determine whether Granite should lease (Alternative 1) or sell (Alternative 2) the machinery.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
November 7
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

Answer 1

Answer

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
	Lease Machinery (Alternative 1)	Sell Machinery (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$                                        286,400	$                                    274,900	$                                                               (11,500)
Costs	$                                          25,300	$                                      13,745 *	$                                                               (11,555)
Income (Loss)	$                                        261,100	$                                    261,155	$                                                                        55

* 274,900 *5% = $ 13,745

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