A contractor needs a crane for 6 months. The purchase price is $180,000 with a resale value of $150,000. Monthly rental is $8,500. Maintenance and insurance if owned would cost $2,000 monthly. What is the total cost difference between renting and buying?
Correct Answer
D) Renting costs $9,000 more
Rental cost: $8,500 × 6 = $51,000. Purchase cost: $180,000 - $150,000 + ($2,000 × 6) = $42,000. Renting costs $9,000 more than buying.
Why This Is the Correct Answer
Option A is correct because the total rental cost ($51,000) exceeds the total ownership cost ($42,000) by exactly $9,000. The rental calculation is straightforward: $8,500 × 6 months = $51,000. The ownership cost includes the net depreciation ($180,000 - $150,000 = $30,000) plus maintenance and insurance ($2,000 × 6 = $12,000) for a total of $42,000. The difference of $51,000 - $42,000 = $9,000 shows renting costs more.
Why the Other Options Are Wrong
Option A: Buying costs $9,000 more
This option incorrectly states that buying costs more when the calculations clearly show renting is more expensive. The $9,000 amount is correct, but the direction is wrong.
Option B: Buying costs $21,000 more
This option has both the wrong direction (buying costs more) and the wrong amount ($21,000), suggesting a fundamental error in the cost comparison calculation.
Option C: Renting costs $21,000 more
This option uses an incorrect calculation that likely forgot to account for the resale value of the equipment, making the ownership cost appear higher than it actually is.
Memory Technique
Remember 'RDOM' - Rental vs Depreciation plus Ongoing Maintenance. Rental is simple multiplication, ownership needs depreciation (purchase minus resale) plus ongoing costs.
Reference Hint
Construction project management or equipment cost analysis sections in contractor reference materials
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?