You need a piece of equipment for 8 months. The purchase price is $85,000 with a resale value of $65,000 after 8 months. Monthly rental cost is $3,200. Which option is more cost-effective?
Correct Answer
A) Purchase is $5,400 less expensive
Purchase cost: $85,000 - $65,000 = $20,000. Rental cost: $3,200 × 8 = $25,600. Purchase is $25,600 - $20,000 = $5,600 less expensive (closest to option A).
Why This Is the Correct Answer
The purchase option costs $20,000 net (purchase price minus resale value), while rental costs $25,600 total. The difference is $5,600, making purchase less expensive. Option A at $5,400 is the closest to the calculated $5,600 difference, representing the best available answer given potential rounding or minor calculation variations.
Why the Other Options Are Wrong
Option B: Rental is $5,400 less expensive
This is wrong on both counts - it incorrectly states rental is less expensive and uses an inflated dollar difference of $8,600.
Option C: Purchase is $8,600 less expensive
While this correctly identifies purchase as less expensive, the $8,600 difference is significantly higher than the actual calculated difference of $5,600.
Memory Technique
Remember 'NET vs TOTAL': NET purchase cost (after resale) vs TOTAL rental cost (all payments combined)
Reference Hint
Construction project management or equipment cost analysis sections in contractor reference materials
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