CEM Equipment Financial Management 2 — Questions and Answers
Question 1: Which depreciation method results in the highest book value during the early years of an asset's life?
- Straight-line (Correct answer)
- Double declining balance
- Sum-of-years-digits
- Units of production
Correct answer: Straight-line
Straight-line depreciation spreads cost evenly, resulting in higher book value early on compared to accelerated methods.
Question 2: A contractor purchases equipment for $180,000 with a $20,000 salvage value and 8-year life. What is the annual straight-line depreciation?
- $20,000
- $22,500 (Correct answer)
- $25,000
- $18,000
Correct 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.
Question 3: What does the term 'economic life' of equipment refer to?
- The manufacturer's warranty period
- The period during which ownership cost is minimized (Correct answer)
- The IRS-defined depreciation schedule
- The time until the equipment physically fails
Correct 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.
Question 4: When calculating equipment ownership costs, interest on investment is typically calculated on which value?
- Purchase price only
- Average annual investment (Correct answer)
- Salvage value only
- Replacement cost
Correct answer: Average annual investment
Interest on investment is commonly applied to the average annual investment, which accounts for declining book value over time.
Question 5: A piece of equipment has a purchase price of $120,000. Using the MACRS 5-year class, what percentage applies in Year 1?
- 20% (Correct answer)
- 32%
- 40%
- 15%
Correct answer: 20%
MACRS 5-year property uses a 200% declining balance, and Year 1 depreciation rate is 20% under the half-year convention.
Question 6: Which ratio best measures an equipment fleet's financial efficiency by comparing revenue generated to assets employed?
- Current ratio
- Debt-to-equity ratio
- Asset turnover ratio (Correct answer)
- Gross profit margin
Correct answer: Asset turnover ratio
Asset turnover ratio (Revenue / Total Assets) measures how efficiently a company uses its assets to generate sales.
Question 7: In an equipment lease agreement, who retains ownership of the asset in an operating lease?
- The lessee
- The lessor (Correct answer)
- A third-party trustee
- A joint venture entity
Correct answer: The lessor
In an operating lease, the lessor retains ownership of the asset while the lessee has the right of use.
CEM Equipment Financial Management 2
Which depreciation method results in the highest book value during the early years of an asset's life?