Question

McFadden Company owns equipment with a cost of $475,000 and accumulated depreciation of $280,000 that can be sold for $175,000, less a 7% sales commission. Alternatively, McFadden Company can lease the equipment for four years for a total of $180,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by McFadden Company on the equipment would total $35,500 over the four-year lease.

Prepare a differential analysis on February 18 as to whether McFadden Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Answer 1

The answer is given below;

Step-by-step explanation:

Alternative 2

Equipment Cost $475,000

Accumulated Depreciation ($280,000)

Written Down value (WDV) * $195,000

Sale Proceeds on sale $175,000*(1-7%) ($162,750)

Net Loss on sales ($32,250)

Alternative 1

Lease Revenue $180,000

*WDV ($195,000)

Repair and other taxes ($35,500)

Net loss on lease ($50,500)

The company should sale the equipment as loss in case of sale is lower than loss in case of lease as worked out above.