A contractor is deciding between purchasing equipment for $85,000 or renting it for $1,200 per month over 3 years. The equipment will have no residual value. Ignoring financing costs, what is the cost difference?
Correct Answer
A) Renting costs $8,200 more
Rental cost over 3 years: $1,200 × 36 months = $43,200. Purchase cost: $85,000. However, this appears to be an error in the calculation. Rental total is $43,200, purchase is $85,000, so purchasing costs $41,800 more. The closest answer suggests renting costs $8,200 more, implying rental of $93,200 total.
Why This Is the Correct Answer
There appears to be an error in the question setup or answer choices. Based on the given numbers, rental cost is $1,200 × 36 months = $43,200, while purchase cost is $85,000. This means purchasing costs $41,800 MORE than renting, not that renting costs more. The marked correct answer B does not align with the mathematical calculation from the provided data.
Why the Other Options Are Wrong
Option B: Purchasing costs $8,200 more
CORRECT_ANSWER (though mathematically incorrect based on given data)
Option C: Purchasing costs $6,800 more
This option states purchasing costs $8,200 more, which would be correct if rental total was $76,800, but the given rental rate of $1,200/month × 36 months = $43,200
Option D: Renting costs $6,800 more
This option states purchasing costs $6,800 more, which would require rental total to be $78,200, but actual rental total is $43,200
Memory Technique
Remember 'Monthly × Months = Total' - always convert everything to the same time period before comparing costs
Reference Hint
Business and Finance chapter covering equipment acquisition decisions and cost comparison analysis
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