Assume a company has equipment with a book value of $60,000. The Company can sell the...
Assume a company has equipment with a book value of $60,000. The Company can sell the equipment through a broker for $100,000 less a 3% commission fee. Alternatively, the Company could lease the equipment to another party for 3 years at a price of $130,000. At the end of the three 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 $11,000 over the three years for maintenance, insurance and taxes.
Calculate the differential net income and write a statement explaining why the company should lease or sell.
Homework Answers
Lease or sell analysis
| Sell | Lease | Increase (Decrease) in income | |
| Net sales revenue | 97,000 | 0 | - 97,000 |
| Lease rental | 0 | 130,000 | 130,000 |
| maintenance, insurance and taxes. | 0 | - 11,000 | - 11,000 |
| Net income | 97,000 | 119,000 | 22,000 |
The company should lease since by leasing the equipment, net income of the company will increase by $22,000 in comparison to sale option.
Kindly comment if you need further assistance. Thanks
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