Rent-or-Purchase Decision
Response to the following problem:
As one aspect of its business, New Lawn Company currently rents a ditch-digging machine for an average of $48 per job. A used machine is available for $995 but would cost $498 to repair. The machine, if purchased, would cost $800 a year to maintain and in two years would need a new chain costing $394. The used digger has a useful life of four years with no salvage value.
Required:
If the company averages 30 jobs a year and has a cost of capital of 10%, which alternative is more profitable?