Practice Test III

Chapter $4$ Assignment: Differential Analysis

Lease or Sell

Assume a company has equipment with a book value of $$100,000($cost of $$140K$ less A$/$D of $$40K).$ The

Company can sell the equipment through a broker for $$100,000$ less a $10\%$ commission fee.

Alternatively, the Company could lease the equipment to another party for $7$ years at a price of

$$150,000.$ At the end of the seven years, the equipment is expected to have no residual value $($book

value of $$0).$ If the equipment is leased, the Company will incur estimated expenses of $$10,000$ every

year for the next seven years for maintenance, insurance and taxes.

Should the company lease or sell and why?