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

Cost-effectiveness analysis is used when benefits like combat capability cannot be expressed in dollars, allowing comparison of how much capability each dollar of investment buys.

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

DoD cost estimates focus on budget authority and outlays (cash costs) rather than accounting depreciation, which is an accrual concept not relevant to budget planning.

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

CBAs are required by OMB Circular A-94 for major federal investments and help Army decision-makers determine whether the economic benefits of a program justify its full life cycle cost.

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

Economic rationality requires that sunk costs be ignored in forward-looking decisions; only incremental future costs and benefits should determine whether to continue or terminate a program.

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

DoD analysts use the Green Book inflation rates published annually by OSD Comptroller to convert between base-year and then-year dollars for budget submissions and life cycle estimates.

ACAP - Army Cost Analysis Position Practice Test

ACAP - Army Cost Analysis Position Practice Test

ACAP Economic Analysis and Life Cycle Costing 2