Question

Differential Analysis for a Lease-or-Sell Decision

Inman Construction Company is considering selling excess machinery with a book value of $280,600 (original cost of $402,000 less accumulated depreciation of $121,400) for $276,900, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $284,900 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 $24,900.

a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
May 25
	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? Explain.

The net   from selling is $.

Answer 1

Solution a:

Differential Analysis
Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2)
25-May
Particulars	Lease Equipment (Alt 1)	Sell Equipment (Alt 2)	Differential Effect on Income (Alt 2)
Revenues	$284,900.00	$276,900.00	-$8,000.00
Costs	-$24,900.00	-$13,845.00	$11,055.00
Income (Loss)	$260,000.00	$263,055.00	$3,055.00

Solution b:

It is advisable to sell the equipment as it will result in higher net income by $3,055 from leasing. The net revenue from selling is $263,055