Question

Differential Analysis for a Lease or Sell Decision

Granite Construction Company is considering selling excess machinery with a book value of $278,900 (original cost of $400,400 less accumulated depreciation of $121,500) for $277,800, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $283,200 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 $26,200.

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)	$	$	$

b. On the basis of the data presented, would it be advisable to lease or sell the machinery?

Answer 1

(a)

Differential analysis is in the following table

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
Revenues	$2,83,200.00	$2,77,800.00	$5,400.00
Costs	$26,200.00	277800*5%=13890	$12,310.00
Income(Loss)	$2,57,000.00	$2,63,910.00	($6,910.00)

(b)As the cash flow is higher if we sell the machinery, it should be sold.