Question

Lease or Sell

Casper Company owns equipment with a cost of $361,900 and accumulated depreciation of $56,800 that can be sold for $273,000, less a 4% sales commission. Alternatively, Casper Company can lease the equipment for three years for a total of $285,400, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Casper Company on the equipment would total $16,600 over the three year lease.

a. Prepare a differential analysis on February 18, as to whether Casper Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
February 18
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. Should Casper Company lease (Alternative 1) or sell (Alternative 2) the equipment?

Answer 1

a
Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
February 18
	Lease Equipment	Sell Equipment	Differential Effect
	(Alternative 1)	(Alternative 2)	on Income
			(Alternative 2)
Revenues	285400	273000	-12400
Costs	-16600	-10920	5680
Income (Loss)	268800	262080	-6720
b
Lease (Alternative 1) the Equipment
Workings:
Commission	10920	=273000*4%