CVS CVS Cost Analysis and Life Cycle Costing Questions and Answers 4 — Questions and Answers
Question 1: A value study team is comparing two HVAC systems: System A costs $200,000 upfront with $15,000 annual operating costs; System B costs $150,000 upfront with $22,000 annual operating costs. Over a 20-year life at a 5% discount rate, which statement best describes the correct LCC approach?
- Discount each system's annual costs to present value and add to initial cost before comparing (Correct answer)
- Multiply annual costs by 20 and add to initial cost, since discounting only applies to revenues
- Compare initial costs only, because operating costs are the owner's responsibility
- Select System B because lower first cost always wins under value methodology
Correct answer: Discount each system's annual costs to present value and add to initial cost before comparing
Life cycle costing requires converting all future costs to present value using the discount rate before summing with initial costs.
Question 2: During a value study, the team discovers that a component's maintenance cost data is only available from a similar but larger facility. What is the most appropriate cost estimating technique to adapt this data?
- Parametric estimating using scaling factors or cost-estimating relationships (Correct answer)
- Ignoring the data and assuming zero maintenance cost
- Using the larger facility's costs unadjusted since maintenance is fixed
- Bottom-up estimating from vendor catalog prices only
Correct answer: Parametric estimating using scaling factors or cost-estimating relationships
Parametric estimating applies cost-estimating relationships and scaling factors to adjust analogous data to the subject project.
Question 3: In an LCC analysis, a project has a study period of 25 years but a major pump has a service life of 10 years. How should the pump be treated in the analysis?
- Include replacement costs at years 10 and 20, plus a salvage credit for remaining life at year 25 (Correct answer)
- Exclude the pump because its life does not match the study period
- Extend the study period to 30 years to fit three full pump lives
- Count only the initial pump purchase since replacements are speculative
Correct answer: Include replacement costs at years 10 and 20, plus a salvage credit for remaining life at year 25
Assets with lives shorter than the study period require scheduled replacement costs and a residual value credit for unused life at the study's end.
Question 4: A value specialist calculates that an energy-saving alternative has a savings-to-investment ratio (SIR) of 0.85. What does this indicate?
- The present value of savings is less than the investment, so the alternative is not cost-effective (Correct answer)
- The alternative pays back in 0.85 years and should be accepted
- The alternative saves 85% of energy costs and should be accepted
- The SIR must be multiplied by the discount rate before interpretation
Correct answer: The present value of savings is less than the investment, so the alternative is not cost-effective
An SIR below 1.0 means discounted savings do not recover the incremental investment, making the alternative economically unattractive.
Question 5: When performing LCC in a period of differing inflation rates for energy versus general goods, the analyst should:
- Apply differential escalation rates to energy costs while keeping the analysis internally consistent (real or nominal) (Correct answer)
- Ignore inflation entirely because it affects all alternatives equally
- Use the general inflation rate for all cost categories to simplify
- Convert all costs to foreign currency to eliminate inflation effects
Correct answer: Apply differential escalation rates to energy costs while keeping the analysis internally consistent (real or nominal)
Costs escalating faster than general inflation, such as energy, require differential escalation rates applied consistently within a real or nominal framework.
Question 6: A team is in the Function Analysis phase and wants to identify high-cost functions for creative effort. Which cost analysis tool best supports this?
- A cost-to-function matrix allocating component costs to the functions they perform (Correct answer)
- A Gantt chart of the construction schedule
- A cash flow statement of the owner's organization
- A depreciation schedule for tax reporting
Correct answer: A cost-to-function matrix allocating component costs to the functions they perform
Distributing costs across functions in a cost-function matrix reveals which functions consume disproportionate cost relative to their worth.
Question 7: In LCC terminology, what is the 'residual value' of an asset at the end of the study period?
- The remaining monetary value, treated as a negative cost (credit) in the analysis (Correct answer)
- The original purchase price adjusted for inflation
- The total of all maintenance costs incurred to date
- The cost to demolish the asset, always treated as a positive cost
Correct answer: The remaining monetary value, treated as a negative cost (credit) in the analysis
Residual value is the asset's worth remaining at the end of the study period and is credited against total life cycle cost.
CVS CVS Cost Analysis and Life Cycle Costing Questions and Answers 4
A value study team is comparing two HVAC systems: System A costs $200,000 upfront with $15,000 annual operating costs; System B costs $150,000 upfront with $22,000 annual operating costs.
Over a 20-year life at a 5% discount rate, which statement best describes the correct LCC approach?