Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business.The truck originally costed $23,000 and has accumulated depreciation of $10,000.The truck can be sold for $14,000.Another company is interested in leasing the truck.It will pay $4,800 per year for three years.Paul's Delivery Service will continue to pay the taxes and license fees for the truck, but all other expenses will be paid by the lessee.Management assumes the expenses for the taxes and license will be $300 per year.Which of the following statements is correct?
A) Paul's Delivery Service should sell the truck because the differential loss from leasing is $500.
B) Paul's Delivery Service should lease the truck because the differential income from leasing is $12,200.
C) Paul's Delivery Service should lease the truck because the differential income from leasing is $300.
D) Paul's Delivery Service is indifferent as to whether the company should lease or sell the truck because there is no differential income or loss between the alternatives.

Question

Quizplus · Accepted Answer

If the truck is sold, Paul's Delivery Service receives $14,000. If leased, the total income over three years is $4,800 x 3 = $14,400, minus taxes and license fees of $300 x 3 = $900, resulting in net income of $13,500 from leasing. The difference between selling and leasing is $13,500 - $14,000 = -$500, indicating a $500 loss from leasing compared to selling.

Paul's Delivery Service Is Considering Selling One of Its Smaller