A contractor needs a $150,000 excavator for 8 months. Rental cost is $4,500/month, purchase price is $150,000, and resale value after 8 months is $125,000. What is the cost advantage of the better option?
Correct Answer
C) Purchase saves $11,000
Rental cost: $4,500 × 8 = $36,000. Purchase cost: $150,000 - $125,000 = $25,000 net cost. Purchase saves $36,000 - $25,000 = $11,000.
Why This Is the Correct Answer
The calculation correctly compares the total cost of each option over the 8-month period. Rental costs $36,000 total ($4,500 × 8 months), while purchasing results in a net cost of $25,000 ($150,000 purchase price minus $125,000 resale value). The difference of $11,000 represents the savings from purchasing rather than renting. This makes option A correct as purchasing saves $11,000 compared to renting.
Why the Other Options Are Wrong
Option A: Rental saves $11,000
While this correctly identifies that purchasing saves money, the amount is wrong. The actual savings is $11,000, not $14,000. This may result from calculation errors in determining the net purchase cost or total rental cost.
Option B: Purchase saves $14,000
This is wrong on both counts - it incorrectly states rental saves money (when purchasing is better) and uses the wrong dollar amount of $14,000 instead of the correct $11,000 difference.
Memory Technique
Remember 'NET vs TOTAL' - compare NET purchase cost (after resale) to TOTAL rental cost, then subtract smaller from larger to find savings amount
Reference Hint
Business and Finance chapter covering equipment acquisition decisions and cost analysis methods
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