When the contractor must acquire additional equipment to carry out the work under the contract, he should decide whether
(a) to purchase, or
(b)to take it on rent with option to purchase, or
(c) to take it on rent without purchase option but under a lease agreement.Under certain conditions it is financially beneficial to purchase, while under other conditions it is more economical and satisfactory to take it on rent. The method selected should be one that will provide the use of the equipment at the lowest total cost, consistent with the use that the contractor will make of the equipment. Each method has its own advantages and disadvantages which should be'considered before making a decision. If cost is the only criterion, an analysis of the cost under each method should give the solution. If other factors are to be considered, they should be evaluated and applied to the cost as a basis on which to reach a decision. The appropriate decision for one contractor will not necessarily apply to another contractor. For instance, Contractor A may engage in a work that requires the use of a mobile crane for most of his jobs, while Contractor B may need the crane only once in 2 or 3 years. It is probable that Contractor
A should purchase the crane while Contractor B should take it on hire. Thus a contractor should purchase equipment that he will use frequently while he should hire equipment that he will use only rarely.
The purchase of equipment, as compared to renting it, has many advantages :
(a) It is more economical if thc equipment is used sufficiently.
(b) It is more likely to be available for use when necessary.
(c) Because ownership should assure better maintenance and care, purchased equipment should be kept in better mechanical condition.
The following are the disadvantages of purchasing and owning equipment :
(a) It may he Illore expensive than hiring.
(b) The purchase of the equipment may require a considerable investment of nloney that may be needed for other purposes.
(c) The ownership of equipment may influence a contractor to continue to use obsolete equipment even after superior equipment has been introduced and available in the market.
(d) The ownership of equipment designed primarily for a given type of work may induce a contractor to contiune doing that type of work, whereas other work requiring different types of equipment might be available at higher profit.
( c ) The ownership of equipment ]night irfiuence a contractor to continue using the equipnlent beyond its econoinic life, hereby increasing the cost of production.The most important factor in deciding whether to purchase or hire it is its expected long
term utilization. Renters of equipment charge a profit, and thus their hourly rate would bc higher than the comparable cost to the owner, if he used the equipmnent extensively. If the expected use is for a short period, then renting it is usually the cheaper.
Once the decision is taken to purchase or rent, the next decision to be made is whether to simply rent the equipment or rent the equipment with the option to purchase it, The second altenlative will result in a higher rental cost as some of the periodic rental charges will be applicable toward the purchase price of the equipment. This is an attractive alternative if the persoil taking the equipment on rent believes he may have enough use for the equipment to purchase it, but is not too sure that the utilization will be as high as predicted. Such rental agreements result in higher hourly charges than simple rental agreements.
(a) to purchase, or
(b)to take it on rent with option to purchase, or
(c) to take it on rent without purchase option but under a lease agreement.Under certain conditions it is financially beneficial to purchase, while under other conditions it is more economical and satisfactory to take it on rent. The method selected should be one that will provide the use of the equipment at the lowest total cost, consistent with the use that the contractor will make of the equipment. Each method has its own advantages and disadvantages which should be'considered before making a decision. If cost is the only criterion, an analysis of the cost under each method should give the solution. If other factors are to be considered, they should be evaluated and applied to the cost as a basis on which to reach a decision. The appropriate decision for one contractor will not necessarily apply to another contractor. For instance, Contractor A may engage in a work that requires the use of a mobile crane for most of his jobs, while Contractor B may need the crane only once in 2 or 3 years. It is probable that Contractor
A should purchase the crane while Contractor B should take it on hire. Thus a contractor should purchase equipment that he will use frequently while he should hire equipment that he will use only rarely.
The purchase of equipment, as compared to renting it, has many advantages :
(a) It is more economical if thc equipment is used sufficiently.
(b) It is more likely to be available for use when necessary.
(c) Because ownership should assure better maintenance and care, purchased equipment should be kept in better mechanical condition.
The following are the disadvantages of purchasing and owning equipment :
(a) It may he Illore expensive than hiring.
(b) The purchase of the equipment may require a considerable investment of nloney that may be needed for other purposes.
(c) The ownership of equipment may influence a contractor to continue to use obsolete equipment even after superior equipment has been introduced and available in the market.
(d) The ownership of equipment designed primarily for a given type of work may induce a contractor to contiune doing that type of work, whereas other work requiring different types of equipment might be available at higher profit.
( c ) The ownership of equipment ]night irfiuence a contractor to continue using the equipnlent beyond its econoinic life, hereby increasing the cost of production.The most important factor in deciding whether to purchase or hire it is its expected long
term utilization. Renters of equipment charge a profit, and thus their hourly rate would bc higher than the comparable cost to the owner, if he used the equipmnent extensively. If the expected use is for a short period, then renting it is usually the cheaper.
Once the decision is taken to purchase or rent, the next decision to be made is whether to simply rent the equipment or rent the equipment with the option to purchase it, The second altenlative will result in a higher rental cost as some of the periodic rental charges will be applicable toward the purchase price of the equipment. This is an attractive alternative if the persoil taking the equipment on rent believes he may have enough use for the equipment to purchase it, but is not too sure that the utilization will be as high as predicted. Such rental agreements result in higher hourly charges than simple rental agreements.
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