ACAP Economic Analysis and Life Cycle Costing 2

Question 1

In economic analysis of Army system alternatives, what is 'cost-effectiveness analysis' used for?

Accepted Answer

Comparing alternatives when benefits cannot be monetized, by relating costs to non-monetary measures of effectiveness

Answer

Calculating the return on investment for a weapon system

Answer

Determining whether a program's benefits exceed its costs in dollar terms

Answer

Ranking alternatives by their NPV of costs alone

Question 2

What is 'depreciation' in the context of Army economic analysis, and is it typically included in DoD life cycle cost estimates?

Accepted Answer

Depreciation is the reduction in asset value over time; it is generally NOT included in DoD LCC estimates because the focus is on cash outlays, not accounting entries

Answer

Depreciation IS included as a recurring O&S cost in all Army LCC estimates

Answer

Depreciation replaces procurement cost in O&S phase calculations

Answer

Depreciation applies only to civilian-acquired systems, not military

Question 3

What is a 'Cost-Benefit Analysis (CBA)' and when is it required for Army decisions?

Accepted Answer

An analysis comparing total discounted costs to total discounted benefits to determine whether an investment is economically justified; required for significant Army business cases and some acquisition decisions

Answer

An analysis of a contractor's proposed costs versus the government's should-cost estimate

Answer

A comparison of the procurement cost of two competing systems

Answer

A review of prior program costs versus planned budgets

Question 4

What is the concept of 'sunk cost' and how should it affect Army acquisition decisions?

Accepted Answer

Sunk costs are past expenditures that cannot be recovered; they should NOT influence future investment decisions, which should be based only on future costs and benefits

Answer

Sunk costs represent the value of prior investment and should always be recovered before terminating a program

Answer

Sunk costs are included in life cycle cost estimates to reflect total program investment

Answer

Sunk costs must be reported to Congress before milestone decisions

Question 5

What is 'inflation' as it applies to Army cost analysis, and what index is commonly used to adjust costs?

Accepted Answer

Inflation is the general rise in prices over time; the DoD uses the DoD Inflation Composite Rates from the OSD Comptroller's Green Book to adjust costs

Answer

Inflation is the increase in contractor costs due to wage growth only; it is captured using the Employment Cost Index (ECI)

Answer

Inflation is applied only to O&S costs, not development or procurement

Answer

Inflation is ignored in Army estimates because DoD uses constant-year dollars

Question 6

In Army economic analysis, what does 'breakeven analysis' determine?

Accepted Answer

The point at which the cumulative savings of a more expensive alternative exceed its additional upfront cost compared to the baseline

Answer

The production quantity at which unit cost equals the program budget

Answer

The year at which the program's costs are fully funded

Answer

The number of units needed to achieve the required military capability