What is the ADVANTAGE to a contractor of purchasing or renting a piece of equipment based on the following information? The equipment has an initial purchase cost of $10,000 with no monthly rental fee, whereas renting it costs $0 upfront but requires a monthly rental payment of $550. If purchased, the equipment will have a salvage value of $2,000 after three years; if rented, the salvage value is $0. Insurance costs $40 per month when the equipment is purchased (and is included in the rental fee when renting, so $0 additional for the renter). Operating costs are $200 per month when the equipment is purchased (and are also included in the rental fee when renting, so $0 additional for the renter). The useful life of the equipment is three years, or 36 months.The equipment would have a useful life of 3 years.

Rationale

Purchasing would save $3,160.

When comparing the total costs associated with purchasing versus renting the equipment over three years, purchasing results in a net savings of $3,160. This figure is derived by calculating the overall expenses of both options, taking into account initial costs, monthly payments, and salvage value.

A (Renting would save $840.) YOUR ANSWER

This choice miscalculates the costs associated with renting. Over three years, renting involves paying $550 per month, resulting in a total of $19,800, without any salvage value. Therefore, the notion that renting would save money is incorrect; it is significantly more expensive than purchasing.

B (Renting would save $2,280.) YOUR ANSWER

This option also incorrectly suggests that renting is a cheaper alternative. The total cost of renting over 36 months is $19,800, while purchasing costs $10,000 minus the $2,000 salvage value, leading to a total cost of $8,000. Renting does not result in savings but rather a higher expense.

C (Purchasing would save $840.) YOUR ANSWER

This choice underestimates the savings from purchasing. While it correctly notes that purchasing has a lower overall cost, the actual savings compared to renting are much greater than $840, as shown in the calculations. The correct savings amount is $3,160, not $840.

D (Purchasing would save $3,160.) CORRECT

This option accurately reflects the savings from purchasing the equipment. The total cost of purchasing is $8,000 after accounting for salvage value, whereas renting totals $19,800. This results in a clear savings of $3,160 when the two costs are compared.

Conclusion

Purchasing the equipment over renting offers significant financial advantages, specifically a savings of $3,160 over the three-year period. This conclusion is reached by thoroughly assessing all associated costs, including initial expenditures, ongoing monthly payments, and salvage values. Consequently, contractors should consider purchasing as the more economical choice for acquiring equipment in this scenario.

Purchasing would save $3,160.

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