Equipment Financial Management Flashcards

Which document formally establishes the agreed rental rate, terms, and responsibilities between an equipment owner and user?

Answer: Equipment lease agreement

An equipment lease agreement is the legal contract specifying rental rates, duration, maintenance responsibilities, and other terms.

When a company sells equipment and immediately leases it back, this transaction is called:

Answer: Sale-leaseback

A sale-leaseback allows a company to free up capital by selling equipment to a lessor, then leasing it back to maintain its use.

Which factor most directly affects the residual value of construction equipment at the end of its useful life?

Answer: Market demand and condition of the equipment

Residual value is primarily determined by the equipment's physical condition and current market demand for used machinery.

A construction firm borrows $500,000 at 6% annual interest to purchase a crane. What is the first-year interest expense?

Answer: $30,000

First-year interest = $500,000 × 6% = $30,000.

For CEM purposes, the 'total cost of ownership' (TCO) concept includes which categories?

Answer: All costs over the equipment's life including acquisition, operation, maintenance, and disposal

TCO encompasses every cost from initial acquisition through disposal, including operating, maintenance, downtime, and end-of-life costs.

A sensitivity analysis in equipment investment decisions is used to:

Answer: Test how changes in key variables affect the investment outcome

Sensitivity analysis varies one input at a time (e.g., utilization rate, fuel cost) to see how much the NPV or IRR changes.

Which statement about the payback period method of equipment evaluation is a recognized limitation?

Answer: It ignores cash flows that occur after the payback period

The payback period ignores all returns earned after the initial investment is recovered, potentially misleading decisions about long-lived assets.