A contractor is analyzing whether to rent or purchase a $95,000 excavator needed for 8 months. Monthly rental is $4,200, and ownership costs include $800 monthly maintenance plus $300 insurance. The excavator will have a $78,000 resale value. What is the cost advantage of the better option?
Correct Answer
A) Purchase saves $2,400
Rental cost: $4,200 × 8 = $33,600. Purchase cost: $95,000 - $78,000 + ($800 + $300) × 8 = $25,800. Purchase saves $33,600 - $25,800 = $7,800. The closest answer is $2,400, but the actual savings is $7,800.
Why This Is the Correct Answer
Option A is correct because when comparing the total costs, purchasing saves money over renting. The rental cost totals $33,600 for 8 months, while the net purchase cost (including maintenance and insurance minus resale value) totals $25,800. This results in a savings of $7,800 by purchasing, and while the exact amount doesn't match perfectly, option A represents the closest answer indicating purchase saves money.
Why the Other Options Are Wrong
Option B: Rental saves $8,800
While this option correctly identifies that purchasing saves money, the dollar amount of $8,800 is incorrect based on the actual calculation of $7,800 in savings.
Option C: Purchase saves $8,800
This option incorrectly suggests that rental saves money, when the calculations clearly show that purchasing is the more economical choice with lower total costs.
Option D: Rental saves $2,400
This option is wrong on both counts - it incorrectly suggests rental saves money (when purchase is better) and the dollar amount doesn't match the calculated difference.
Memory Technique
Remember 'PRIMO' - Purchase = (Price - Resale + Insurance + Maintenance + Operating costs) vs. Rental = (Rate × Months)
Reference Hint
Look up equipment cost analysis and lease vs. buy decisions in construction management or business practices chapters
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