A contractor is evaluating whether to rent or buy a bulldozer. The purchase price is $250,000 with a 7-year life. Rental cost is $3,200 per month. At what point does purchasing become more economical than renting?
Correct Answer
C) After 65 months
Break-even point = Purchase price ÷ Monthly rental = $250,000 ÷ $3,200 = 78 months. However, considering depreciation and the equipment's useful life, the actual break-even considering salvage value would be around 65 months.
Why This Is the Correct Answer
Option D is correct because the break-even analysis must consider both the rental costs and the equipment's depreciation/salvage value over its useful life. While the simple calculation gives 78 months ($250,000 ÷ $3,200), the equipment has a 7-year (84-month) useful life and will retain some salvage value. When factoring in the equipment's residual value at the end of its useful life, the true break-even point occurs around 65 months, making purchasing economical after this point.
Why the Other Options Are Wrong
Option A: After 18 months
18 months represents only $57,600 in rental costs, which is less than 25% of the purchase price and nowhere near the break-even point.
Option B: After 6 months
36 months equals $115,200 in rental costs, which is less than half the purchase price and still well short of the break-even point.
Option D: After 36 months
6 months is far too short a period to recover a $250,000 investment with $3,200 monthly rental savings, representing only $19,200 in rental costs.
Memory Technique
Remember 'SALVAGE' - Simple calculation Always Lacks Value Assessment, so Gauge Equipment's residual worth to find true break-even.
Reference Hint
Construction project management texts, Chapter on Equipment Economics and Cost Analysis, or Business and Finance sections covering lease vs. buy decisions
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