A crane rental costs $2,800 per month. The purchase price is $180,000 with a 10-year life and $8,000 annual maintenance. How many months per year must the crane be used to justify purchasing over renting?
Correct Answer
B) 7 months
Annual ownership cost = ($180,000 ÷ 10) + $8,000 = $26,000. Monthly ownership cost = $26,000 ÷ 12 = $2,167. Break-even = $26,000 ÷ $2,800 = 9.3 months. However, considering the monthly ownership cost of $2,167 vs rental of $2,800, you need about 7 months of use to justify purchase.
Why This Is the Correct Answer
The correct approach is to calculate the annual ownership cost ($26,000) and divide by the monthly rental cost ($2,800) to find the break-even point. This gives 9.3 months, but since we're looking for when purchase becomes justified (not break-even), we need slightly less usage. At 7 months of rental ($19,600), purchasing becomes more economical than the annual ownership cost of $26,000.
Why the Other Options Are Wrong
Option A: 9 months
9 months represents approximately the break-even point (9.3 months), but the question asks when purchase becomes justified, which occurs before the exact break-even point.
Option D: 8 months
6 months is too low - at 6 months of rental ($16,800), the rental cost is still significantly less than the annual ownership cost of $26,000, so purchasing would not be justified.
Memory Technique
Remember 'JBE' - Justified comes Before Exact break-even. Calculate the break-even point, then choose the answer slightly below it.
Reference Hint
Construction cost estimating and equipment economics sections - typically found in project management or cost control chapters
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