Steady Construction Company is considering selling excess machinery with a book value of $280,000

Steady Construction Company is considering selling excess machinery with a book value of $280,000 (original cost of $400,000 less accumulated depreciation of $120,000) for $244,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $255,000 for five years, after which it is expected to have no residual value. During the period of the lease, Steady Construction Company’s costs of repairs, insurance, and property tax expenses are expected to be $23,800.

a. Prepare a differential analysis, dated April 16, 2014, to determine whether Steady should lease (Alternative 1) or sell (Alternative 2) the machinery.

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


Answer:


a. Differential Analysis 
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) 
April 16, 2014 
  
Lease 
Machinery 
(Alternative 1) 
Revenues $255,000 $244,000 –$11,000 
Costs –23,800 –12,200* 11,600 
Income (Loss) $231,200 $231,800 $ 600 
    
a. 
* $244,000 × 5% 
b. Sell the machinery. The net gain from selling is $600.