CEM Equipment Financial Management 3

Question 1

The Net Present Value (NPV) of an equipment investment is best described as:

Accepted Answer

Present value of future cash flows minus initial investment

Answer

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?

Accepted Answer

Specialized equipment needed sporadically

Answer

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?

Accepted Answer

To accumulate capital for future equipment purchases

Answer

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?

Accepted Answer

Fuel consumption

Answer

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:

Accepted Answer

NPV of the investment equals zero

Answer

IRR is the discount rate that makes the net present value of all cash flows from an investment equal to zero.

(CEM) Certified Equipment Manager Practice Test