A contractor needs to decide between purchasing a $120,000 crane or renting it for $2,400 per month for a 36-month project. If the crane depreciates to $75,000 after 36 months, what is the total cost difference?
Correct Answer
D) Renting costs $41,400 more
Rental cost: $2,400 × 36 months = $86,400. Purchase cost: $120,000 - $75,000 = $45,000. Renting costs $86,400 - $45,000 = $41,400 more than purchasing.
Why This Is the Correct Answer
The correct answer properly calculates the total rental cost ($2,400 × 36 = $86,400) and compares it to the net cost of purchasing ($120,000 - $75,000 depreciated value = $45,000). The difference shows renting costs $41,400 more than purchasing ($86,400 - $45,000 = $41,400). This represents the true economic comparison between the two options over the 36-month period.
Why the Other Options Are Wrong
Option A: Renting costs $86,400 more
This uses the total rental cost ($86,400) as the difference, failing to subtract the net purchase cost and incorrectly suggesting this entire amount is the cost difference.
Option B: Purchasing costs $41,400 more
This uses only the depreciation amount ($45,000) as the cost difference, ignoring the rental costs entirely and incorrectly stating purchasing costs more.
Option C: Purchasing costs $45,000 more
This incorrectly states that purchasing costs more, when the calculation clearly shows renting is the more expensive option by $41,400.
Memory Technique
Remember 'RPN': Rental total, Purchase Net cost (after depreciation), then find the difference. The depreciated value is money you get back, so subtract it from purchase price.
Reference Hint
Construction accounting and equipment management chapters, specifically sections on lease vs. buy analysis and depreciation calculations
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