Question - Bur or rent decision

I have no idea how to go about solving this one. Is this representative of the PMP type of questions?

Your organization needs some specialized equipment for the next project. The project is anticipated to last one year. Salvage rate on the equipment is 25 cents on the dollar. When the project is done, you will have no use for the equipment. When performing a rent-or-buy analysis for this piece of equipment, the following facts are established: the equipment price is $28,000. The rental price is $3000/month for the first four months followed by $2000/month thereafter. What is your best option?

 a. Either option is viable – for one year, the rental price equals the purchase price
b. If the project ends early, it will be less expensive to rent
c. If the project is late, it will less expensive to buy
d. Unless the project is guaranteed to end 4 months early, buy the equipment

admin's picture

The answer choices and question is not congruent. Generally we have to make an assumption here for the project duration. Only if we know the druation we can determine one over another.

Salvage rate of 25 cents / dollar means you would have Salvage value of $7000 at end of 1 year. So if you buy the equipment you would be left with $7000 if your project completes in 1 year. Also if your project gets delayed you will save the rent. So its good to buy.