A contractor needs to estimate the cost of a backup generator for a 30-day rental period. The generator costs $150,000 new, has a 10-year useful life, and the rental rate is $400 per day. What is the ownership cost per day assuming straight-line depreciation?
Correct Answer
B) $41.10
Annual depreciation = $150,000 ÷ 10 years = $15,000. Daily ownership cost = $15,000 ÷ 365 days = $41.10 per day (excluding interest, insurance, and maintenance).
Why This Is the Correct Answer
The correct answer uses straight-line depreciation to calculate daily ownership cost. First, the annual depreciation is calculated by dividing the initial cost ($150,000) by the useful life (10 years), which equals $15,000 per year. Then, this annual depreciation is divided by 365 days to get the daily ownership cost of $41.10. This represents the daily cost of owning the equipment based solely on depreciation.
Why the Other Options Are Wrong
Option A: $35.62
This answer ($35.62) is too low and likely results from an incorrect calculation, possibly using 30 days instead of 365 days in the denominator or making an error in the depreciation calculation.
Option C: $45.50
This answer ($45.50) is too high and suggests an error in the calculation process, possibly including additional costs that weren't specified in the problem or using an incorrect time period.
Option D: $52.75
This answer ($52.75) is significantly higher than the correct calculation and likely includes costs beyond straight-line depreciation or uses an incorrect formula altogether.
Memory Technique
Use the acronym 'PAY' - Purchase price ÷ Annual life ÷ Year (365 days) = daily ownership cost. This helps remember the three-step process for equipment depreciation calculations.
Reference Hint
Look up equipment depreciation and cost estimation in construction management or accounting sections of your reference materials, typically found in project cost control chapters.
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