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 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) Costs Income (Loss) b. On the basis of the data presented, would it be advisable to lease or sell the machinery?

Explanation / Answer

It would be advisable to sell the machinery.

Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) 7-Nov Lease Machinery Sell Machinery Differential Effect on Income Revenues $200,000 $180,000 $20,000 Costs $34,400 $9,000 $25,400 Income (Loss) $165,600 $171,000 ($5,400)

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