9.4: Lease or Sell Equipment
A company may have purchased and used a fixed asset, such as equipment, a vehicle, or a building, and finds it no longer needs that item in its operations. The company may choose to sell the asset or lease it to another company to generate an income stream. The company can use a differential analysis to determine the alternative that provides the greater financial return.
Harper Company purchased equipment for $40,000 several years ago. It currently has a book value of $15,000. Harper can sell the equipment for $10,000. The company would have to pay a 2% commission on the sale. Alternatively, the company could lease the equipment to Alden Company for $2,400 for each of four years. At the end of the lease period, the company could return the equipment to its manufacturer for $100 for scrap. In both cases, it will cost Harper Company $900 to restore the equipment site in the factory once it is removed.
|
Lease |
Sell |
Difference |
|
|
Revenue 1 |
$9,600 |
$10,000 |
|
|
\(\ \quad \quad\)Scrap value |
100 |
||
|
Costs: |
|||
|
\(\ \quad \quad\)Sales commission 2 |
200 |
||
|
Income |
$9,700 |
$9,800 |
$100 |
1
$2,400 x 4
2
$10,000 x 2%
The income from the four-year lease plus the scrap value is compared to the selling price minus the commission. The $900 restoration cost is not considered since it must be paid under either option. The original purchase price is a sunkcost that will not be recouped or changed regardless of the decision; therefore, it is ignored as well. Since selling the equipment will result in a $100 greater return, the company should sell the equipment.