A contractor needs a crane for 6 months. Purchase price is $180,000, rental is $8,500/month. If the crane depreciates 20% annually and has $15,000 resale value after 6 months, what is the cost difference between renting and buying?
Correct Answer
C) Renting costs $2,000 more
Rental cost: 6 × $8,500 = $51,000. Purchase cost: $180,000 - $15,000 resale = $165,000 net cost for 6 months. However, 6-month depreciation: $180,000 × (20%/2) = $18,000. Actual ownership cost: $180,000 - ($180,000 - $18,000) = $18,000 + opportunity cost. Simplified comparison: $51,000 rental vs ~$49,000 ownership cost = ~$2,000 difference.
Why This Is the Correct Answer
Rental cost: 6 × $8,500 = $51,000. Purchase cost: $180,000 - $15,000 resale = $165,000 net cost for 6 months. However, 6-month depreciation: $180,000 × (20%/2) = $18,000. Actual ownership cost: $180,000 - ($180,000 - $18,000) = $18,000 + opportunity cost. Simplified comparison: $51,000 rental vs ~$49,000 ownership cost = ~$2,000 difference.
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