Your company needs a $250,000 excavator for 18 months. The purchase price is $250,000 with a resale value of $180,000 after 18 months. Monthly rental cost is $4,500. What is the cost difference between renting and buying?
Correct Answer
A) Renting costs $11,000 more
Rental cost: $4,500 × 18 = $81,000. Purchase cost: $250,000 - $180,000 = $70,000 net cost. Renting costs $11,000 more than buying ($81,000 - $70,000 = $11,000).
Why This Is the Correct Answer
Option A is correct because it properly calculates both the total rental cost and the net purchase cost, then compares them accurately. The rental cost over 18 months is $4,500 × 18 = $81,000. The net purchase cost is the initial cost minus resale value: $250,000 - $180,000 = $70,000. The difference shows renting costs $11,000 more than buying ($81,000 - $70,000 = $11,000).
Why the Other Options Are Wrong
Option B: Buying costs $11,000 more
This option incorrectly states that buying costs more than renting, when the calculation clearly shows renting is more expensive. It also has the wrong dollar amount comparison.
Option C: Renting costs $7,000 more
This option has the correct direction (renting costs more) but uses the wrong dollar amount of $7,000 instead of the correct $11,000 difference.
Option D: Buying costs $7,000 more
This option is wrong on both counts - it incorrectly states buying costs more than renting, and it uses the wrong dollar amount of $7,000.
Memory Technique
Remember 'NET vs RENT' - always subtract resale value to get NET purchase cost before comparing to total RENT payments
Reference Hint
Construction cost estimating and equipment management chapters in contractor reference materials
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