Kincaid Company owns equipment with a cost of 367700 and acc

Kincaid Company owns equipment with a cost of $367,700 and accumulated depreciation of $56,200 that can be sold for $274,600, less a 3% sales commission. Alternatively, Kincaid Company can lease the equipment for three years for a total of $285,700, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Kincaid Company on the equipment would total $15,300 over the three year lease.

a. Prepare a differential analysis on February 18, as to whether Kincaid Company should lease (Alternative 1) or sell (Alternative 2) the equipment. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

b. Should Kincaid Company lease (Alternative 1) or sell (Alternative 2) the machine?

Solution

a

Differential Analysis

Lease (Alt. 1) or Sell (Alt. 2) Equipment

18-Feb

Lease Equipment (Alternative 1)

Sell Equipment (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$    285,700.00

$ 274,600.00

$ 11,100.00

Costs

$      15,300.00

$    8,238.00

$ 7,062.00

Income (Loss)

$    270,400.00

$ 266,362.00

$ 4,038.00

b

Kincaid Company should give Equipment for Lease because it gives higher cash return. So Alternative 1 is better.