CEM Equipment Financial Management 4 — Questions and Answers
Question 1: A piece of equipment cost $200,000 new. After 5 years it sells for $50,000. What is the total ownership cost from depreciation alone?
- $200,000
- $150,000 (Correct answer)
- $50,000
- $250,000
Correct answer: $150,000
Total depreciation loss equals purchase price minus resale value: $200,000 - $50,000 = $150,000.
Question 2: Which financial metric is most useful for comparing equipment investment alternatives of different sizes?
- Net Present Value
- Payback period in years
- Profitability Index (benefit-cost ratio) (Correct answer)
- Total project cash flow
Correct answer: Profitability Index (benefit-cost ratio)
The Profitability Index (NPV / Initial Investment) normalizes returns, enabling fair comparison across differently-sized investments.
Question 3: A contractor uses a hurdle rate when evaluating equipment purchases. The hurdle rate represents:
- The equipment's physical wear rate
- The minimum acceptable rate of return on the investment (Correct answer)
- The maximum allowable downtime percentage
- The ratio of debt to equity for the purchase
Correct answer: The minimum acceptable rate of return on the investment
The hurdle rate is the minimum return a company requires before approving a capital investment.
Question 4: Which of the following best describes 'sunk cost' in equipment financial management?
- Future costs that cannot be avoided
- Money already spent that cannot be recovered (Correct answer)
- The cost to sink pilings for equipment foundations
- The present value of future maintenance costs
Correct answer: Money already spent that cannot be recovered
Sunk costs are past expenditures that have already been incurred and cannot be recovered, so they should not influence future decisions.
Question 5: In equipment cost estimating, the term 'ownership cost' most commonly excludes which of the following?
- Depreciation
- Interest on investment
- Fuel and lubricants (Correct answer)
- Insurance and taxes
Correct answer: Fuel and lubricants
Fuel and lubricants are operating costs, not ownership costs; ownership costs cover depreciation, interest, insurance, taxes, and storage.
Question 6: What is the primary advantage of using accelerated depreciation methods for tax purposes?
- Higher book value in early years
- Larger tax deductions in earlier years, improving cash flow (Correct answer)
- Longer equipment life recognition
- Reduced maintenance cost allocation
Correct answer: Larger tax deductions in earlier years, improving cash flow
Accelerated depreciation front-loads deductions, reducing taxable income and tax payments in early years, improving near-term cash flow.
Question 7: A fleet manager tracks 'cost per hour' for each machine. Which statement is correct?
- Cost per hour decreases indefinitely as the machine ages
- Cost per hour includes only variable costs
- Cost per hour rises as maintenance costs increase with age (Correct answer)
- Cost per hour is fixed regardless of utilization
Correct answer: Cost per hour rises as maintenance costs increase with age
As equipment ages, cumulative repair and maintenance costs increase, driving up the cost per operating hour.
CEM Equipment Financial Management 4
A piece of equipment cost $200,000 new.
After 5 years it sells for $50,000.
What is the total ownership cost from depreciation alone?