CEM Equipment Financial Management 3 — Questions and Answers
Question 1: The Net Present Value (NPV) of an equipment investment is best described as:
- Total undiscounted cash flows minus initial cost
- Present value of future cash flows minus initial investment (Correct answer)
- Annual profit multiplied by equipment life
- Book value at end of useful life
Correct answer: Present value of future cash flows minus initial investment
NPV equals the present value of all expected future cash flows minus the initial investment cost.
Question 2: A contractor is deciding between renting and owning equipment. Which factor most favors renting?
- High utilization rate expected
- Long project duration
- Specialized equipment needed sporadically (Correct answer)
- Equipment prices expected to rise
Correct answer: Specialized equipment needed sporadically
When specialized equipment is needed only occasionally, renting avoids idle ownership costs and maintenance burdens.
Question 3: What is the purpose of a fleet replacement reserve fund?
- To pay for daily operating expenses
- To accumulate capital for future equipment purchases (Correct answer)
- To cover warranty claims from manufacturers
- To fund operator training programs
Correct answer: To accumulate capital for future equipment purchases
A replacement reserve fund sets aside money over time so capital is available when aging equipment must be replaced.
Question 4: Which cost is classified as a variable operating cost for heavy equipment?
- Insurance premiums
- License fees
- Fuel consumption (Correct answer)
- Finance charges
Correct answer: Fuel consumption
Fuel consumption varies directly with equipment usage hours, making it a variable operating cost.
Question 5: Internal Rate of Return (IRR) is the discount rate at which:
- Depreciation equals zero
- NPV of the investment equals zero (Correct answer)
- Operating profit is maximized
- Debt service coverage equals one
Correct answer: NPV of the investment equals zero
IRR is the discount rate that makes the net present value of all cash flows from an investment equal to zero.
Question 6: Under a capital (finance) lease, how is the leased asset recorded on the lessee's balance sheet?
- As an off-balance-sheet item
- As an expense in the income statement
- As both an asset and a liability (Correct answer)
- As goodwill under intangible assets
Correct answer: As both an asset and a liability
Under a capital lease, the lessee records the asset's value and a corresponding lease obligation on the balance sheet.
Question 7: Equipment utilization rate is calculated as:
- Actual hours worked / Available hours × 100 (Correct answer)
- Revenue generated / Equipment cost × 100
- Downtime hours / Total hours × 100
- Maintenance cost / Replacement cost × 100
Correct answer: Actual hours worked / Available hours × 100
Utilization rate equals actual productive hours divided by total available hours, expressed as a percentage.
CEM Equipment Financial Management 3
The Net Present Value (NPV) of an equipment investment is best described as: