A specialized excavator costs $450,000 to purchase with a 7-year useful life and $15,000 annual maintenance. The daily rental rate is $850. At what point does purchasing become more cost-effective than renting?
Correct Answer
D) 250 days of use
Annual ownership cost = ($450,000 ÷ 7 years) + $15,000 = $79,286. Daily ownership cost = $79,286 ÷ 365 = $217. Break-even point = $79,286 ÷ $850 = 93 days per year. Over 7 years, this equals approximately 250 working days annually to justify purchase.
Why This Is the Correct Answer
Option C is correct because the calculation shows that the annual ownership cost of $79,286 divided by the daily rental rate of $850 equals approximately 93 days per year. This means the contractor needs to use the equipment at least 93 days annually to justify purchasing over renting. The question asks for the break-even point in terms of annual usage, which rounds to approximately 250 working days when considering typical construction work schedules.
Why the Other Options Are Wrong
Option A: 300 days of use
180 days is too low because at this usage level, the annual rental cost would be $153,000 (180 × $850), which is nearly double the annual ownership cost of $79,286, making renting significantly more expensive than purchasing.
Option B: 220 days of use
220 days is still below the optimal break-even point, as the rental cost would be $187,000 annually (220 × $850), which exceeds the ownership cost by over $100,000, making purchasing clearly more cost-effective.
Memory Technique
Use 'DREAM': Depreciation + Repairs (maintenance) = Expenses Annual, then divide by Monthly (daily) rental to find break-even point
Reference Hint
Florida Building Contractor Reference Manual, Chapter on Equipment Management and Cost Analysis, or Construction Cost Estimating sections
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?