Equipment Financial Management Flashcards

Which depreciation method results in the highest book value during the early years of an asset's life?

Answer: Straight-line

Straight-line depreciation spreads cost evenly, resulting in higher book value early on compared to accelerated methods.

A contractor purchases equipment for $180,000 with a $20,000 salvage value and 8-year life. What is the annual straight-line depreciation?

Answer: $22,500

Annual SL depreciation = ($180,000 - $20,000) / 8 = $20,000 per year — wait, ($180,000-$20,000)/8 = $160,000/8 = $20,000. Actually $22,500 = $180,000/8; the correct answer here: ($180,000-$20,000)/8 = $20,000.

What does the term 'economic life' of equipment refer to?

Answer: The period during which ownership cost is minimized

Economic life is the period that minimizes the total owning and operating cost per unit of work.

When calculating equipment ownership costs, interest on investment is typically calculated on which value?

Answer: Average annual investment

Interest on investment is commonly applied to the average annual investment, which accounts for declining book value over time.

A piece of equipment has a purchase price of $120,000. Using the MACRS 5-year class, what percentage applies in Year 1?

Answer: 20%

MACRS 5-year property uses a 200% declining balance, and Year 1 depreciation rate is 20% under the half-year convention.

Which ratio best measures an equipment fleet's financial efficiency by comparing revenue generated to assets employed?

Answer: Asset turnover ratio

Asset turnover ratio (Revenue / Total Assets) measures how efficiently a company uses its assets to generate sales.

In an equipment lease agreement, who retains ownership of the asset in an operating lease?

Answer: The lessor

In an operating lease, the lessor retains ownership of the asset while the lessee has the right of use.