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

question 74

Multiple Choice

Paul's Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business.The truck originally cost $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.

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Definitions:

Total Return

The overall return on an investment over a specific time period, including both capital gains and dividends or interest, expressed as a percentage of the investment's initial cost.

Real Rate

The interest rate adjusted for inflation, reflecting the true return on an investment over time.

Dividend

A portion of a company's earnings that is distributed to shareholders, usually in the form of cash payments or additional shares.

Geometric Average

A method of calculating the average rate of return that accounts for compounding by taking the nth root (where n is the count of numbers) of the product of the values.