Asset Management Managing Asset Lifecycles 3 — Questions and Answers
Question 1: An asset manager notices rising corrective maintenance costs and declining output on aging equipment. Which lifecycle decision framework should be applied?
- Repair vs. replace analysis (Correct answer)
- Capital rationing
- Straight-line depreciation review
- Payback period calculation
Correct answer: Repair vs. replace analysis
Repair vs. replace analysis weighs the cost of continued maintenance against the cost and benefits of replacement to determine the economically optimal choice.
Question 2: What is 'economic life' of an asset?
- The period over which the asset minimizes total average annual cost (Correct answer)
- The physical lifespan until the asset breaks down
- The time until the asset is fully depreciated
- The lease term specified in the contract
Correct answer: The period over which the asset minimizes total average annual cost
Economic life ends when rising maintenance costs plus declining efficiency make replacement cheaper than continued operation, minimizing total average annual cost.
Question 3: Which disposal method typically yields the highest financial return for a retired asset?
- Sale on the secondary market (Correct answer)
- Scrapping for material value
- Donation to a nonprofit
- Trade-in toward a replacement
Correct answer: Sale on the secondary market
Selling on the secondary market captures the asset's remaining market value, which generally exceeds scrap value or trade-in credit.
Question 4: Under GAAP, when is a gain or loss on asset disposal recognized?
- At the time the asset is sold or retired (Correct answer)
- When the asset is fully depreciated
- Over the remaining useful life
- When cash is received from the buyer
Correct answer: At the time the asset is sold or retired
GAAP requires immediate recognition of the difference between proceeds and net book value at the point of sale or retirement.
Question 5: A preventive maintenance program is BEST described as:
- Scheduled servicing to prevent failures before they occur (Correct answer)
- Repairs made after an asset breaks down
- Monitoring asset condition to predict failures
- Replacing assets on a fixed schedule regardless of condition
Correct answer: Scheduled servicing to prevent failures before they occur
Preventive maintenance uses time- or usage-based schedules to service assets before failures occur, reducing unplanned downtime.
Question 6: What is the main advantage of condition-based maintenance over time-based preventive maintenance?
- It performs maintenance only when actual asset condition warrants it (Correct answer)
- It is simpler to schedule
- It eliminates all maintenance costs
- It requires no sensor technology
Correct answer: It performs maintenance only when actual asset condition warrants it
Condition-based maintenance uses real-time data to trigger maintenance only when needed, avoiding unnecessary work and extending component life.
Question 7: Which document formally authorizes the retirement of an asset from the asset register?
- Asset disposal authorization form (Correct answer)
- Purchase order
- Depreciation schedule
- Bill of lading
Correct answer: Asset disposal authorization form
An asset disposal authorization form provides the formal approval and audit trail required to remove an asset from the register and accounting records.
Asset Management Managing Asset Lifecycles 3
An asset manager notices rising corrective maintenance costs and declining output on aging equipment.
Which lifecycle decision framework should be applied?