Differential Analysis for a Lease or Sell Decision Granite Construction Company

Question

Differential Analysis for a Lease or Sell Decision

Granite Construction Company is considering selling excess machinery with a book value of $279,000 (original cost of $399,200 less accumulated depreciation of $120,200) for $276,100, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $283,500 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 $25,900.

a. Prepare a differential analysis, dated November 7 to determine whether Granite 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?

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) $ $ $

Explanation / Answer

***Calculation of $ 16705 = (276100*5%)-276100+279000

It is advisable to sell machines as it will lead to higher income

Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) Nov-07 Lease Machinery (Alternative 1) Sell Machinery (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $2,83,500.00 $2,76,100.00 $7,400.00 Costs $(25,900.00) $16,705.00 $(42,605.00) Income (Loss) $2,57,600.00 $2,59,395.00 $(1,795.00)

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