Question

Differential Analysis for a Lease or Sell Decision Inman Construction Company is considering selling excess machinery with a book value of $282,700 (original cost of $400,800 less accumulated depreciation of $118,100) for $277,200, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $285,200 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 $25,900. 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

a	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	285,200	277,200	(8,000)
	Costs	25,900	13,860	(12,040)
	Income (Loss)	259,300	263,340	4,040
b	Net from selling is $4040, so it should sell the machinery.