17. 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.
Answer: D
Purchasing would save $3,160.
Purchasing the equipment provides a significant financial advantage, resulting in a total savings of $3,160 compared to renting over the equipment's useful life of three years.
A) Renting would save $840.
This option is incorrect because renting does not save money; instead, it incurs ongoing costs. The total rental expenses, including monthly payments, would exceed the total costs associated with purchasing the equipment.
B) Renting would save $2,280.
This choice is also incorrect. Renting the equipment includes a monthly fee of $550, which adds up to $19,800 over three years, while purchasing would only cost $8,000 after accounting for the salvage value, indicating that renting is more expensive.
C) Purchasing would save $840.
This option miscalculates the savings associated with purchasing the equipment. When considering the total costs, purchasing results in a much larger savings than $840, as it includes the salvage value and lower overall expenses compared to renting.
D) Purchasing would save $3,160.
This option is correct. The total cost of renting for three years is $19,800, while the total cost of purchasing (considering purchase price, insurance, operating costs, and salvage value) is $16,640. The difference of $3,160 represents the savings achieved by purchasing instead of renting.
Conclusion
The analysis clearly shows that purchasing the equipment is financially superior, resulting in a savings of $3,160 compared to renting. All other options underestimate the costs associated with renting or miscalculate the savings from purchasing, reinforcing the advantage of the purchase decision.