Question

Keating Co. is considering disposing of equipment with a cost of $61,000 and accumulated depreciation of $42,700. Keating Co. can sell the equipment through a broker for $27,000, less a 6% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $50,000. Keating will incur repair, insurance, and property tax expenses estimated at $12,000 over the five-year period. At lease-end, the equipment is expected to have no residual value.
1. The net differential income from the lease alternative is ______________?

Answer 1

Answer:

$12,620

Explanation:

The net income of selling the equipment through a broker (Nb) is given by the selling price minus the broker commission:

$N_b=\ 27,000*(1-0.06)\\N_b=\ 25,380$

The net income of leasing the equipment to Gunner Co. (Nl) is given by the total lease amount subtracted by the repair, insurance, and property tax expenses:

$N_l=\ 50,000-\ 12,000\\N_l=\ 38,000$

The net differencial income (NDI) from the lease alternative is:

$NDI = N_l-N_b=\ 38,000-\ 25,380\\NDI =\ 12,620$