CEM Equipment Financial Management 2

Question 1

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

Accepted Answer

Straight-line

Answer

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?

Accepted Answer

$22,500

Answer

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?

Accepted Answer

The period during which ownership cost is minimized

Answer

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?

Accepted Answer

Average annual investment

Answer

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?

Accepted Answer

20%

Answer

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

(CEM) Certified Equipment Manager Practice Test

(CEM) Certified Equipment Manager Practice Test

CEM Equipment Financial Management 2