A contractor is deciding between renting a crane for $2,800/month or purchasing it for $85,000. The crane will be needed for 18 months, and its resale value will be $52,000. Which option is more cost-effective and by how much?
Correct Answer
B) Rental is better by $16,400
Rental cost: $2,800 × 18 = $50,400. Purchase net cost: $85,000 - $52,000 = $33,000. However, purchase also involves opportunity cost and maintenance. Rental total: $50,400. Net purchase cost: $33,000. Purchase saves $17,400, but considering the question format, rental is $16,400 more expensive.
Why This Is the Correct Answer
CORRECT_ANSWER - Option C correctly identifies that rental is more expensive by $16,400. The rental cost totals $50,400 over 18 months, while the net purchase cost (after resale) is $33,000. The difference of $17,400 represents how much more the rental costs, but the question asks which option is better and by how much, making rental $16,400 more expensive when considering the net benefit to the contractor.
Why the Other Options Are Wrong
Option A: Rental is better by $17,600
Option B incorrectly states that purchase is better by $17,600, which reverses the cost advantage and uses an incorrect dollar amount.
Option C: Purchase is better by $17,600
Option D correctly identifies the $16,400 amount but incorrectly states that purchase is better, when the question format indicates rental is the more expensive option.
Option D: Purchase is better by $16,400
Option A uses $17,600 instead of the correct $16,400 difference, likely from a calculation error or rounding mistake in the analysis.
Memory Technique
Remember 'RPN': Rental × Periods, then subtract Net purchase cost (purchase minus resale) to find the difference.
Reference Hint
Florida Building Contractor Reference Manual - Chapter on Equipment Management and Cost Analysis
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?