Equipment Financial Management Flashcards

A piece of equipment cost $200,000 new. After 5 years it sells for $50,000. What is the total ownership cost from depreciation alone?

Answer: $150,000

Total depreciation loss equals purchase price minus resale value: $200,000 - $50,000 = $150,000.

Which financial metric is most useful for comparing equipment investment alternatives of different sizes?

Answer: Profitability Index (benefit-cost ratio)

The Profitability Index (NPV / Initial Investment) normalizes returns, enabling fair comparison across differently-sized investments.

A contractor uses a hurdle rate when evaluating equipment purchases. The hurdle rate represents:

Answer: The minimum acceptable rate of return on the investment

The hurdle rate is the minimum return a company requires before approving a capital investment.

Which of the following best describes 'sunk cost' in equipment financial management?

Answer: Money already spent that cannot be recovered

Sunk costs are past expenditures that have already been incurred and cannot be recovered, so they should not influence future decisions.

In equipment cost estimating, the term 'ownership cost' most commonly excludes which of the following?

Answer: Fuel and lubricants

Fuel and lubricants are operating costs, not ownership costs; ownership costs cover depreciation, interest, insurance, taxes, and storage.

What is the primary advantage of using accelerated depreciation methods for tax purposes?

Answer: Larger tax deductions in earlier years, improving cash flow

Accelerated depreciation front-loads deductions, reducing taxable income and tax payments in early years, improving near-term cash flow.

A fleet manager tracks 'cost per hour' for each machine. Which statement is correct?

Answer: Cost per hour rises as maintenance costs increase with age

As equipment ages, cumulative repair and maintenance costs increase, driving up the cost per operating hour.