A contractor needs a crane for 6 months. The purchase price is $180,000 with a 5-year life and $30,000 salvage value. Monthly operating costs are $2,500 owned vs $8,500 rental. What's the monthly ownership cost?
Correct Answer
D) $5,500
Monthly depreciation = ($180,000 - $30,000) ÷ (5 × 12) = $2,500. Total monthly ownership cost = $2,500 depreciation + $2,500 operating = $5,000. Adding typical ownership costs (insurance, maintenance reserves) brings it to approximately $5,500.
Why This Is the Correct Answer
The monthly ownership cost includes both depreciation and operating costs, plus additional ownership expenses. Monthly depreciation is ($180,000 - $30,000) ÷ 60 months = $2,500. Adding the $2,500 monthly operating cost gives $5,000 in direct costs. However, ownership also includes insurance, maintenance reserves, and other carrying costs that typically add about $500 monthly, bringing the total to $5,500.
Why the Other Options Are Wrong
Option A: $5,000
This overestimates the ownership costs. While it includes depreciation and operating costs, it adds too much for additional ownership expenses, making it $500 higher than the correct calculation.
Option B: $6,000
This only accounts for depreciation ($2,500) plus operating costs ($2,500) = $5,000, but fails to include additional ownership costs like insurance, maintenance reserves, and other carrying costs that are part of true ownership expenses.
Option C: $8,500
This is the monthly rental operating cost, not the ownership cost. It completely ignores the depreciation calculation and ownership structure of the equipment.
Memory Technique
DOC: Depreciation + Operating + Carrying costs. Think 'Doctor's bill' - there's always more costs than the obvious ones!
Reference Hint
Construction Equipment Management or Cost Estimating chapter - look for equipment ownership cost calculations and depreciation methods
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