Claxon Company owns a machine with a cost of $302,940 and accumulated depreciati

ID: 2571451 • Letter: C

Question

Claxon Company owns a machine with a cost of $302,940 and accumulated depreciation of $66,560 that can be sold for $260,100, less a 4% sales commission. Alternatively, the machine can be leased by Claxon Company for three years for a total of $271,510, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Claxon Company on the machine would total $18,404 over the three years. Required: 1. Prepare a differential analysis on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter “0”. A colon (:) will automatically appear if required. 2. Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine? Claxon Company owns a machine with a cost of $302,940 and accumulated depreciation of $66,560 that can be sold for $260,100, less a 4% sales commission. Alternatively, the machine can be leased by Claxon Company for three years for a total of $271,510, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Claxon Company on the machine would total $18,404 over the three years. Required: 1. Prepare a differential analysis on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter “0”. A colon (:) will automatically appear if required. 2. Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine? Required: 1. Prepare a differential analysis on January 12 as to whether Claxon Company should lease (Alternative 1) or sell (Alternative 2) the machine. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter “0”. A colon (:) will automatically appear if required. 2. Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine?

Explanation / Answer

Calculation of cash flows under two alternatives

Particulars

Alternative 1

Alternative 2

Cash flow from sale or Lease payments

$271,510

$260,100

Less: 4% commission on sale

($10,404)

Less: Repairs and maintenance expenses

($18,404)

Net cash inflows

$253,106

$249,696

Should Claxon Company lease (Alternative 1) or sell (Alternative 2) the machine?

ans)

Company should choose Alternative 1 (Leasing) since cash inflows net is more than Alternative 2

Alternative 1 (Lease) Recommended