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 $175,000 (original cost of $315,000 less accumulated depreciation of $140,000) for $180,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $200,000 for four 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 $34,400.

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? Explain.

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars lease (Alternative 1)   sell (Alternative 2) Differential Sale Value of old machinery = 180,000*(1-.05)            171,000.00          (171,000.00) Lease rent               200,000.00            200,000.00 Cost of repairs, insurance, and property tax expenses               (34,400.00)            (34,400.00) Total relevant cost               165,600.00            171,000.00               (5,400.00) B It is advisable to sell the machinery as it would result in gain of 5,400

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