Question

Lease or sell decision E12-1 Yamada Industries is considering selling excess machinery with a book value of $220,000 (original cost of $600,000 less accumulated depreciation of $380, 000) for $200,000, less a 6% brokerage commission. Alternatively, the machinery can be leased for a total of $290,000 for five years, after which it is expected to have no residual value. During the period of the lease, Yamada Industries' costs of repairs, insurance, and property tax expenses are expected to be $71,000. erential from 0,000 a. Prepare a differential analysis report for the lease or sell decision. b.On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

Answer 1

Value from Sales Proceeds of Machinery
		Sales Price	$          200,000.00
		Less: Commission (6%)	$            12,000.00
Cash Flow on date of Sale-		Net realisation	$          188,000.00
There will be no capital Gain as Net Realisation is less than the Book Value
Lease Option
		Lease Rental	$          290,000.00
		Less: Cost of repair, Insurance and Property Tax	$            71,000.00
		Net Realisation	$          219,000.00
		A. Differential Analysis
		lease Machinery or Sell Machinery
			Lease Machinery	Sell Machinery	Differential effect on Income
		Revenue	$          290,000.00	$      200,000.00	$ 90,000.00
		Costs	$            71,000.00	$        12,000.00	$ 59,000.00
		Income (Loss)	$          219,000.00	$      188,000.00	$ 31,000.00
		B. Lease the Machinery as the net gain in leasing is more by $31,000