Question

Differential Analysis for a Lease-or-Sell Decision

Sure-Bilt Construction Company is considering selling excess machinery with a book value of $278,600 (original cost of $398,000 less accumulated depreciation of $119,400) for $275,400, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,800 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 $24,800.

a. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt 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. Prepare a differential analysis, dated May 25 to determine whether Sure-Bilt 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	$283800	$275400	-8400
Costs	-24800	275400*5% = -13770	11030
Income (Loss)	$259000	$261630	$2630

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

The net income from selling is $.2630