Differential Analysis for a Lease or Sell Decision

Granite Construction Company is considering selling excess machinery with a book value of $278,600 (original cost of $398,700 less accumulated depreciation of $120,100) for $275,300, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $284,500 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 $25,100.

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)
Revenues	$fill in the blank 6de92504504201d_1	$fill in the blank 6de92504504201d_2	$fill in the blank 6de92504504201d_3
Costs	fill in the blank 6de92504504201d_4	fill in the blank 6de92504504201d_5	fill in the blank 6de92504504201d_6
Income (Loss)	$fill in the blank 6de92504504201d_7	$fill in the blank 6de92504504201d_8	$fill in the blank 6de92504504201d_9

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Subtract the lease costs from the lease revenues. Subtract the sell machine costs from the sell machine revenue. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. On the basis of the data presented, would it be advisable to lease or sell the machinery?

Lease the machinerySell the machinerySell the machinery