A contractor needs to decide between purchasing a $180,000 excavator or renting it for $2,800 per month. If the contractor expects to use the equipment 8 months per year for 3 years, and the excavator will have a $45,000 resale value, what is the total cost difference between purchasing and renting?
Correct Answer
D) Renting costs $67,200 more
Purchase cost: $180,000 - $45,000 resale = $135,000. Rental cost: $2,800 × 8 months × 3 years = $67,200. The difference is $202,200 - $135,000 = $67,200 more for renting.
Why This Is the Correct Answer
To find the cost difference, calculate total costs for each option. Purchasing: $180,000 initial cost minus $45,000 resale value equals $135,000 net cost. Renting: $2,800 per month × 8 months per year × 3 years equals $67,200 total rental cost. The difference is $202,200 - $135,000 = $67,200, with renting costing $67,200 more than purchasing.
Why the Other Options Are Wrong
Option A: Purchasing costs $32,200 more
This incorrectly states that purchasing costs more than renting. The calculation shows renting ($67,200) costs significantly more than the net purchase cost ($135,000). The direction of the cost difference is reversed in this option.
Option B: Renting costs $32,200 more
While this correctly identifies that renting costs more, the amount is wrong. The actual difference is $67,200, not $32,200. This likely results from calculation errors in either the rental costs or net purchase costs.
Option C: Purchasing costs $67,200 more
This incorrectly states that purchasing costs more than renting, which is backwards. Additionally, the $67,200 amount, while mathematically appearing in the problem, represents the total rental cost, not the cost difference between options.
Memory Technique
Remember 'PRR': Purchase minus Resale versus Rental total. Always subtract resale value from purchase price to get true ownership cost, then compare to total rental payments.
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