AMP AMP Capital Investment & Decision Making 1 — Questions and Answers
Question 1: Total Cost of Ownership (TCO) in asset management includes which of the following?
- Purchase price only
- Purchase, operation, maintenance, and disposal costs (Correct answer)
- Depreciation and insurance costs only
- Installation and commissioning costs only
Correct answer: Purchase, operation, maintenance, and disposal costs
TCO captures all costs associated with an asset over its entire life, including acquisition, operation, maintenance, and end-of-life disposal.
Question 2: Net Present Value (NPV) is used in capital investment decisions to:
- Calculate the payback period of an investment
- Determine the current value of future cash flows from an asset (Correct answer)
- Estimate asset depreciation for tax purposes
- Measure the internal rate of return on equity
Correct answer: Determine the current value of future cash flows from an asset
NPV discounts future cash flows back to the present using a required rate of return, allowing asset managers to evaluate whether an investment creates or destroys value.
Question 3: Which capital budgeting technique identifies the discount rate at which an investment's NPV equals zero?
- Payback period
- Return on assets (ROA)
- Internal Rate of Return (IRR) (Correct answer)
- Profitability index
Correct answer: Internal Rate of Return (IRR)
IRR is the discount rate that makes the net present value of all cash flows from an investment equal to zero, serving as a benchmark for capital allocation decisions.
Question 4: In asset investment planning, a 'capital expenditure' (CapEx) refers to:
- Day-to-day operating expenses like utilities
- Funds used to acquire, upgrade, or maintain long-term physical assets (Correct answer)
- Short-term procurement of consumable supplies
- Labor costs for maintenance crews
Correct answer: Funds used to acquire, upgrade, or maintain long-term physical assets
CapEx covers spending on acquiring, improving, or extending the useful life of fixed assets, distinguishing it from operating expenditures (OpEx).
Question 5: A replacement decision model in asset management typically compares:
- New asset acquisition cost versus salvage value only
- Marginal cost of keeping the old asset versus cost of acquiring a new one (Correct answer)
- Vendor pricing across three suppliers
- Asset age versus manufacturer warranty period
Correct answer: Marginal cost of keeping the old asset versus cost of acquiring a new one
Replacement decisions involve comparing the escalating marginal cost of maintaining an aging asset against the total cost of acquiring and operating a replacement asset.
Question 6: Which term describes the minimum acceptable rate of return required before an organization will invest in a project?
- Discount rate
- Hurdle rate (Correct answer)
- Salvage rate
- Payback threshold
Correct answer: Hurdle rate
The hurdle rate is the minimum rate of return an organization requires before approving a capital investment, typically set at or above the weighted average cost of capital (WACC).
AMP AMP Capital Investment & Decision Making 1
Total Cost of Ownership (TCO) in asset management includes which of the following?