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

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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

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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.

Answers (1)

Lavina April 12, 2023 в 22:16

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.

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