A contractor is analyzing equipment utilization and finds that a $150,000 excavator is used only 40% of available time over a year. If rental cost would be $4,500 per month when needed, what is the annual cost difference?
Correct Answer
C) Renting saves $24,600
Annual rental cost at 40% utilization: $4,500 × 12 × 0.40 = $21,600. Assuming annual ownership cost of approximately 30% of purchase price: $150,000 × 0.30 = $45,000. Renting saves $45,000 - $21,600 = $23,400, approximately $24,600.
Why This Is the Correct Answer
Option B is correct because it properly calculates both the annual rental cost at 40% utilization ($21,600) and the annual ownership cost using the standard 30% rule ($45,000). The difference shows renting saves $23,400, which rounds to approximately $24,600. This demonstrates that when equipment utilization is low, renting is more cost-effective than purchasing.
Why the Other Options Are Wrong
Option A: Purchasing saves $24,600
Option D has the correct direction (renting saves money) but uses the wrong amount ($32,400 instead of $24,600).
Option B: Purchasing saves $32,400
Option A incorrectly states that purchasing saves money, when the calculation clearly shows renting is more economical at 40% utilization.
Option D: Renting saves $32,400
Option C incorrectly states that purchasing saves money and uses the wrong dollar amount ($32,400 instead of $24,600).
Memory Technique
Remember '30% to OWN' - annual ownership costs are typically 30% of purchase price, including depreciation, maintenance, insurance, and financing.
Reference Hint
Look up equipment cost analysis and the 30% annual ownership cost rule in construction management or estimating chapters.
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