A contractor is analyzing whether to rent or purchase a $45,000 excavator. The rental cost is $850 per week, and the project will need the equipment for 18 weeks. If purchased, the equipment can be sold for $38,000 after the project. What is the cost difference between renting and purchasing?
Correct Answer
A) Renting costs $8,300 more than purchasing
Rental cost: $850 × 18 weeks = $15,300. Purchase cost: $45,000 - $38,000 resale = $7,000. Renting costs $15,300 - $7,000 = $8,300 more than purchasing.
Why This Is the Correct Answer
Option A is correct because it properly calculates both the total rental cost and the net purchase cost. The rental cost is $850 × 18 weeks = $15,300. The net purchase cost is the initial cost minus the resale value: $45,000 - $38,000 = $7,000. The difference shows renting costs $8,300 more than purchasing ($15,300 - $7,000 = $8,300).
Why the Other Options Are Wrong
Option C: The costs are equal
The costs are clearly not equal. There is an $8,300 difference between the rental cost of $15,300 and the net purchase cost of $7,000.
Option D: Purchasing costs $8,300 more than renting
This option uses the wrong calculation method. It appears to subtract only the resale value from the rental cost ($15,300 - $0 = $15,300) rather than comparing the net costs of both options properly.
Memory Technique
Remember 'NET vs TOTAL': NET purchase cost (after resale) vs TOTAL rental cost. Think 'Buy low, sell high' - the resale value reduces your actual equipment cost.
Reference Hint
Construction project management and equipment cost analysis sections, typically found in business management chapters of contractor exam prep books
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