Honolulu Inc. is replacing one of its old machines and is conducting a lease or sell differential analysis. Honolulu can lease out the old machine for $175,000. Costs of leasing the machine are Estimated Repair Expense of $23,000, Estimated Insurance Expence of $9.000, and Estimated Property Tax Expense of $3,500. The salvage value of the machinery after the lease will be $0.00. Honolulu can sell the machine for $115,000 minus a commission of 5%.

Should Honolulu lease or sell this machine, and why?

a.) Honolulu should sell the machine. They would incur a loss of $115,000 by leasing.

b.) Honolulu should sell the machine. They would incur a loss of $60,000 by leasing.

c.) Honolulu should lease the machine. They would earn an additional profit of $30,250 by leasing.

d.) Honolulu should lease the machine. They would earn an additional profit of $29,750 by leasing.

To determine whether Honolulu Inc. should lease or sell the machine, we need to compare the net cash inflows from both options.

### 1. **Selling the Machine:**

- Selling price = $115,000
- Commission = 5% of $115,000 = $115,000 × 0.05 = $5,750
- Net cash inflow from selling = $115,000 - $5,750 = **$109,250**

### 2. **Leasing the Machine:**

- Lease income = $175,000
- Repair expenses = $23,000
- Insurance expenses = $9,000
- Property tax expenses = $3,500
- Salvage value = $0 (since it's mentioned the salvage value is $0 after leasing)

- Total expenses for leasing = $23,000 + $9,000 + $3,500 = **$35,500**
- Net cash inflow from leasing = $175,000 - $35,500 = **$139,500**

### 3. **Comparing the Two Options:**

- Net cash inflow from leasing = $139,500
- Net cash inflow from selling = $109,250
- Difference = $139,500 - $109,250 = **$30,250**

Since leasing the machine results in an additional profit of $30,250 compared to selling it, the correct answer is:

**c.) Honolulu should lease the machine. They would earn an additional profit of $30,250 by leasing.**

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Would you like more details on how the leasing and selling costs were calculated?

Here are 5 follow-up questions for further exploration:
1. What would the decision be if the repair expenses were higher than $23,000?
2. How would the analysis change if the salvage value after leasing was not zero?
3. What impact would increasing the commission on selling to 10% have?
4. Would the decision change if Honolulu had to pay additional taxes on the leasing income?
5. What if Honolulu had an opportunity to invest the proceeds from selling? How would that affect the analysis?

**Tip:** Always consider all future costs (like maintenance, taxes, and insurance) in lease vs. sell analyses to get an accurate comparison.

Honolulu Inc. is replacing one of its old machines and is conducting a lease or sell differential analysis. Honolulu can lease out the old machine for $175,000. Costs of leasing the machine are Estimated Repair Expense of $23,000, Estimated Insurance Expense of $9,000, and Estimated Property Tax Expense of $3,500. The salvage value of the machinery after the lease will be $0.00. Honolulu can sell the machine for $115,000 minus a commission of 5%. Should Honolulu lease or sell this machine, and why? a.) Honolulu should sell the machine. They would incur a loss of $115,000 by leasing. b.) Honolulu should sell the machine. They would incur a loss of $60,000 by leasing. c.) Honolulu should lease the machine. They would earn an additional profit of $30,250 by leasing. d.) Honolulu should lease the machine. They would earn an additional profit of $29,750 by leasing.

Learn how to determine whether Honolulu Inc. should lease or sell its old machine by comparing net cash inflows from both options. The problem involves calculating commission, repair expenses, insurance, and property tax for accurate decision-making in cost-benefit analysis.

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