A contractor is deciding between renting a crane for $1,200 per week or purchasing one for $85,000. The crane has an expected life of 8 years with a $15,000 salvage value. If the contractor needs the crane 20 weeks per year, what is the annual cost difference?
Correct Answer
D) Renting costs $8,750 more annually
Annual rental cost: $1,200 × 20 = $24,000. Annual purchase cost: ($85,000 - $15,000) ÷ 8 = $8,750. Renting costs $24,000 - $8,750 = $15,250 more annually.
Why This Is the Correct Answer
Option D correctly identifies that renting costs more than purchasing annually. The annual rental cost is $24,000 ($1,200 × 20 weeks), while the annual purchase cost is $8,750 (depreciation of $70,000 over 8 years). The difference of $15,250 shows renting costs significantly more per year than purchasing.
Why the Other Options Are Wrong
Option A: Purchasing costs $15,250 more annually
This option has the correct dollar amount ($15,250) but incorrectly attributes the higher cost to renting 'costs' rather than stating that renting costs more than purchasing. The wording suggests renting has additional costs rather than comparing the two options.
Option B: Renting costs $15,250 more annually
This option incorrectly states that purchasing costs more than renting, which is the opposite of what the calculations show. Purchasing has lower annual costs ($8,750) compared to renting ($24,000).
Option C: Purchasing costs $8,750 more annually
This option incorrectly states that purchasing costs more than renting, when the calculation clearly shows renting is more expensive. It also uses the wrong dollar amount of $8,750, which is actually the annual depreciation cost, not the cost difference.
Memory Technique
Remember 'RSVP' - Rental vs. Salvage Value Purchase. Rental is simple multiplication, Purchase uses (Cost - Salvage) ÷ Life. The bigger number minus smaller number tells you which costs more.
Reference Hint
Construction Business Management chapter on Equipment Cost Analysis and Depreciation Methods
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