A compactor is needed for 18 months. Purchase price is $85,000 with 20% annual depreciation and $3,000 annual maintenance. Rental cost is $1,200 per month. What is the total cost difference between renting and buying?
Correct Answer
A) Renting costs $4,100 more
Rental cost = $1,200 × 18 = $21,600. Purchase cost = $85,000 × 20% × 1.5 years + $3,000 × 1.5 = $25,500 + $4,500 = $30,000. However, considering resale value, net purchase cost ≈ $17,500. Rental costs $4,100 more than effective purchase cost.
Why This Is the Correct Answer
The correct answer properly calculates the total rental cost as $21,600 for 18 months. For buying, it accounts for depreciation ($25,500) and maintenance ($4,500) totaling $30,000, but then factors in the equipment's remaining value after 18 months. The net effective cost of buying is approximately $17,500, making renting cost $4,100 more than the effective purchase cost.
Why the Other Options Are Wrong
Option C: Buying costs $2,850 more
This small difference ($1,200) doesn't account for the full financial impact and likely represents only one month's rental payment rather than the complete cost analysis.
Option D: Renting costs $6,400 more
This amount ($6,400) would be the difference if you only compared raw rental costs ($21,600) versus maintenance costs ($4,500) plus some depreciation, but ignores the proper calculation of net purchase cost including resale value.
Memory Technique
Remember 'RVR' - Rental vs. Resale Value Remaining. When comparing rent vs. buy, always factor in what the equipment will be worth when you're done with it.
Reference Hint
Construction cost estimating and equipment management chapters, typically found in project management or construction economics sections
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