Question

Lease or Sell

Casper Company owns equipment with a cost of $361,200 and accumulated depreciation of $55,300 that can be sold for $274,400, less a 3% sales commission. Alternatively, Casper Company can lease the equipment for three years for a total of $286,200, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Casper Company on the equipment would total $16,800 over the three year lease.

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

Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
February 18
	Lease Equipment (Alternative 1)	Sell Equipment (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. Should Casper Company lease (Alternative 1) or sell (Alternative 2) the equipment?

Answer 1

a
Differential Analysis
Lease (Alt. 1) or Sell (Alt. 2) Equipment
February 18
	Lease Equipment	Sell Equipment	Differential Effect
	(Alternative 1)	(Alternative 2)	on Income
			(Alternative 2)
Revenues	286200	274400	-11800
Costs	-16800	-8232	8568
Income (Loss)	269400	266168	-3232
b
Lease (Alternative 1) the equipment
Note: Commission = 274400*3% = 8232