Question

Granite Construction Company is considering selling excess machinery with a book value of $328,100 (original cost of $449,200 less accumulated depreciation of $121,100) for $222,800, less a 6% brokerage commission. Alternatively, the machinery can be leased for a total of $217,860 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 $16,708.

Required:
A. Prepare a differential analysis, dated November 7 to determine whether Granite should lease (Alternative 1) or sell (Alternative 2) the machinery.
B. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.

Answer 1

A)

book value = $328,100

net selling cost = $222,800 - 6% = $209,432

net lease revenue = $217,860 - $16,708 = $201,152

Granite Construction

Differential analysis

November 7

Alternative 1 Alternative 2 Differential

SELL LEASE amount

Revenue from sales $222,800 $0 $222,800

- sales expenses ($3,368) $0 ($3,368)

Revenue from lease $0 $217,860 ($217,860)

- lease expenses $0 ($16,708) $16,708

total $209,432 $201,152 $8,280

B) Granite Construction should sell the equipment since it will earn $8,280 more than leasing it, and that without considering the value of money in time (discount rate on lease revenue).