Inman Construction Company is considering selling excess machinery with a book v
ID: 2476721 • Letter: I
Question
Inman Construction Company is considering selling excess machinery with a book value of $280,200 (original cost of $402,000 less accumulated depreciation of $121,800) for $276,400, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $283,900 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 $24,900.
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)
$
$
$
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
DIFFERENTIAL ANALYSIS Lease Machinary or Sell Machinary January 3,2014 LEASE MACHINE(ALTERNATIVE 1) SELL MACHINARY(ALTERNATIVE 2) DIFFERENTIAL EFFECT ON INCOME(ALTERNATIVE 2) Revenues $283,900 $276,400 ($7,500) Costs ($24,900) -13820 $11,080 Income (Loss) $259,000 $262,580 $3,580 * $276400*5%= 13820 Decision- Sell the machinary. The net gain from selling is $3580