AMP Capital Investment & Decision Making Flashcards

Total Cost of Ownership (TCO) in asset management includes which of the following?

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.

Net Present Value (NPV) is used in capital investment decisions to:

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.

Which capital budgeting technique identifies the discount rate at which an investment's NPV equals zero?

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.

In asset investment planning, a 'capital expenditure' (CapEx) refers to:

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).

A replacement decision model in asset management typically compares:

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.

Which term describes the minimum acceptable rate of return required before an organization will invest in a project?

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).