Inman Construction Company is considering selling excess machinery with a book v
ID: 2453458 • Letter: I
Question
Inman Construction Company is considering selling excess machinery with a book value of $280,800 (original cost of $401,800 less accumulated depreciation of $121,000) for $276,900, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $284,400 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,300.
a. Prepare a differential analysis, dated January 3, 2014, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
January 3, 2014
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
$
$
$
Costs
Income (Loss)
$
$
$
b. On the basis of the data presented, would it be advisable to lease or sell the machinery?
SelectLease the machinerySell the machinery
a. Prepare a differential analysis, dated January 3, 2014, to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery.
Differential Analysis
Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2)
January 3, 2014
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on Income (Alternative 2)
Revenues
$
$
$
Costs
Income (Loss)
$
$
$
Explanation / Answer
Answer to part a:
Differential Analysis:
Lease Machinery (Alternative 1) or sell machinery (Alternative 2):
Particulars
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on income (Alternative 2)
Revenues
$284400
$276900
-$7500
Costs
$25300
$13845 ($276900*5%)
+$11455
Income (Loss)
$259100
$263055
+$3955
Answer to part b:
Based on the data presented above, it is advisable to sell the machinery.
Reason: It gives more income when compared to leasing.
Particulars
Lease Machinery (Alternative 1)
Sell Machinery (Alternative 2)
Differential Effect on income (Alternative 2)
Revenues
$284400
$276900
-$7500
Costs
$25300
$13845 ($276900*5%)
+$11455
Income (Loss)
$259100
$263055
+$3955