27.07.2022 - 19:21

# Sure-Bilt Construction Company is considering selling excess machinery with a book value of $283,300 (original cost of$401,300 less accumulated depreciation of $118,000) for$277,600, less a 5% brokerage commission. Alternatively, the machinery can be le

Question:

Sure-Bilt Construction Company is considering selling excess machinery with a book value of {eq}$283,300 {/eq} (original cost of {eq}$401,300 {/eq} less accumulated depreciation of {eq}$118,000 {/eq}) for {eq}$277,600 {/eq}, less a {eq}5% {/eq} brokerage commission. Alternatively, the machinery can be leased for a total of {eq}$284,100 {/eq} for five years, after which it is expected to have no residual value. During the period of the lease, Sure-Bilt Construction Company’s costs of repairs, insurance, and property tax expenses are expected to be {eq}$24,700 {/eq}.

Prepare a differential analysis, dated January 3, 2014, to determine whether Sure-Bilt should lease (Alternative 1) or sell (Alternative 2) the machinery.

• Alternative 1: Lease Machinery Total lease revenue for five years= {$284,100} Total cost of repairs, insurance, and property tax expenses for five years= {$24,700} Net cash inflow= {$284,100 -$24,700}= {$259,400} Alternative 2: Sell Machinery Sale price of machinery= {$277,600 - (5% * $277,600)}= {$263,720} Book value of machinery= {$283,300} Taxable gain on sale= {$263,720 - $283,300}= {-$19,580} Tax liability= {(40% * (-$19,580))}= {-$7,832} Net cash inflow= {$263,720 +$7,832}= {$271,552} Differential analysis: Net cash inflow from leasing= {$259,400} Net cash inflow from selling= {$271,552} Therefore, Sure-Bilt should choose to sell the machinery as it results in a higher net cash inflow than leasing. Do you know the answer? Not sure about the answer? Find the right answer to the question Sure-Bilt Construction Company is considering selling excess machinery with a book value of$283,300 (original cost of $401,300 less accumulated depreciation of$118,000) for \$277,600, less a 5% brokerage commission. Alternatively, the machinery can be le by subject Business, and if there is no answer or no one has given the right answer, then use the search and try to find the answer among similar questions.