Question

Differential Analysis for a Lease-or-Sell Decision

Differential Analysis for a Lease-or-Sell Decision Sure-Bilt Construction Company is considering selling excess machinery with a book value of $283,600 (original cost of $401,600 less accumulated deprciation of $118,000) for $277,100. less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,900 for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,000. a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bil; 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. b. On the basis.of the data presented, would it be advisable to lease or sell the machinery? Explain.

Answer 1

Solution Differential Analysis Lease the machinery (Alt. 1) or sell the machinery (Alt. 2) May 25 Sell the Differential Lease the machinery (Alternative 1) machinery Effect on Income (Alternative 2) (Alternative 2) S0 S0 $283,900 $25,000 $258,900 $277,100 $13,855 S0 S0 $263,245 $277,100 $13,855 $283,900 $25,000 $4,345 Gross proceeds from sale of machinery Brokerage commission Lease rentals (5 Years) Cost of repairs, insurance etc. (5 Years) Income (Loss) Decision: Since selling the machinery (Alternative 2) would result into differential net income of $4,345 hence the Company should sell the machinery (Alternative 2). Sell the Machinery (Alternative 2)