Question

Lease or Sell Obj. 1Plymouth Company owns equipment with a cost of $600,000 and accumulated depreciation of $375,000 that can be sold for $300,000, less a 4% sales commission. Alternatively, Plymouth Company can lease the equipment for four years for a total of $320,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Plymouth Company on the equipment would total $40,000 over the four-year lease. Prepare a differential analysis on August 7 as to whether Plylmouth Company should lease (Alternative 1) or sell (Alternative 2) the equipment.

Answer 1

Answer:

The plymouth company should be selling the equipment as the net gain from the selling is 8000 dollars.

Explanation:

Find the complete differential analysis in the attachment

Answer 2

Answer:

The equipment should be sold because Incremental income from outright sales is $8,000

Explanation:

We will compare the income from both  alternatives and find the difference

Outright sale= 300,000 - (4% × 300,000)=   288,000

Lease option = 320,000 -40,000=                 280,000

Incremental income                                            8,000

The  accumulated depreciation value should be ignored because it is not a cash flow item.

Plymouth should sell the equipment outrightly. This would produce an additional income  $8,000.