A contractor must choose between buying or renting a crane for the duration of a

Question

A contractor must choose between buying or renting a crane for the duration of a 4 year construction project. The contractor uses an MARR of 8%. The crane costs $540,000 and can be sold for $390,000 after 4 years. The cost to operate and maintain the crane is $220,000 per year. Renting the crane costs $300,000 per year including all operating and maintenance costs. Determine the incremental benefit-cost ratio that the contractor should use to decide between buying and renting. Express your answer to two decimal places.

Explanation / Answer

BUY

PV of cost= 540,000+220,000/(1.08)+220,000/(1.08^2)+220,000/(1.08^3)+220,000/(1.08^4) = 1,268,667.91

PV of Benefit=390,000/(1.08^4)= 286,661.64

BCR= 286,661.64 / 1,268,667.91 = 0.23

BCR which is less than 1 is written in negative i.e. -0.23

RENT

PV of cost=300,000/(1.08) + 300,000/(1.08^2) + 300,000/(1.08^3) + 300,000/(1.08^4)= 993,638.05

benefit=0

BCR=0

now as 0>-0.23 so rent is beneficial because BCR increases by 0.23 in renting

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