CEM Equipment Financial Management 4

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?

Accepted Answer

$150,000

Answer

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?

Accepted Answer

Profitability Index (benefit-cost ratio)

Answer

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:

Accepted Answer

The minimum acceptable rate of return on the investment

Answer

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?

Accepted Answer

Money already spent that cannot be recovered

Answer

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?

Accepted Answer

Fuel and lubricants

Answer

Fuel and lubricants are operating costs, not ownership costs; ownership costs cover depreciation, interest, insurance, taxes, and storage.

(CEM) Certified Equipment Manager Practice Test