CVS CVS Cost Analysis and Life Cycle Costing Questions and Answers 5 — Questions and Answers
Question 1: Two alternatives have unequal service lives: Alternative X lasts 15 years and Alternative Y lasts 20 years. Which method allows a fair LCC comparison without extending the study period?
- Convert each alternative's costs to an equivalent uniform annual cost (EUAC) (Correct answer)
- Compare undiscounted total costs divided by first cost
- Add five years of zero cost to Alternative X
- Compare only the initial investments and ignore service life
Correct answer: Convert each alternative's costs to an equivalent uniform annual cost (EUAC)
Annualizing each alternative's total present value cost over its own life yields comparable equivalent uniform annual costs despite unequal lives.
Question 2: A value study on a hospital finds that a proposed cheaper flooring material would double annual cleaning labor. The best justification for rejecting it under value methodology is that:
- The increase in discounted operating costs exceeds the initial cost savings over the study period (Correct answer)
- First cost savings are irrelevant to owners
- Cleaning labor is a sunk cost and cannot change
- Hospitals are exempt from life cycle costing requirements
Correct answer: The increase in discounted operating costs exceeds the initial cost savings over the study period
Value decisions rest on total life cycle cost, so higher present-value operating costs can outweigh a lower first cost.
Question 3: What is the primary purpose of a sensitivity analysis in a life cycle cost study?
- To test whether the ranking of alternatives changes when uncertain inputs like discount rate or energy prices vary (Correct answer)
- To guarantee that estimates are accurate to within one percent
- To eliminate the need for a discount rate
- To allocate overhead costs among departments
Correct answer: To test whether the ranking of alternatives changes when uncertain inputs like discount rate or energy prices vary
Sensitivity analysis varies uncertain assumptions to determine whether the preferred alternative remains robust across plausible input ranges.
Question 4: In a value study, 'cost worth' or the worth of a function is best defined as:
- The lowest cost to reliably perform the required function (Correct answer)
- The market price of the finished product
- The actual cost currently allocated to that function
- The sum of all secondary function costs
Correct answer: The lowest cost to reliably perform the required function
Worth is the least cost to perform a function reliably, and comparing it to actual cost exposes value improvement opportunities.
Question 5: A discount rate of 7% is used in an LCC study. A one-time replacement cost of $50,000 occurs in year 10. Which factor converts this to present value?
- The single present worth factor, 1/(1.07)^10 (Correct answer)
- The uniform series present worth factor for 10 years
- The capital recovery factor at 7% for 10 years
- The sinking fund factor multiplied by 10
Correct answer: The single present worth factor, 1/(1.07)^10
A single future amount is discounted using the single present worth factor, 1 divided by (1+i) raised to the year of occurrence.
Question 6: Which cost category is most often underestimated or omitted in life cycle cost analyses of public infrastructure, according to value methodology practice?
- Operation, maintenance, and repair costs over the facility's life (Correct answer)
- Initial design fees, which are always excluded
- Land acquisition, because it never affects LCC
- Construction financing, which is legally excluded
Correct answer: Operation, maintenance, and repair costs over the facility's life
Long-term operation and maintenance costs frequently exceed initial costs yet are commonly underrepresented in infrastructure LCC studies.
Question 7: During the Evaluation phase, a team compares alternatives using LCC but the owner emphasizes non-monetary criteria such as aesthetics and disruption. What is the appropriate approach?
- Combine LCC results with a weighted evaluation matrix scoring non-monetary criteria (Correct answer)
- Discard the LCC results because money cannot measure aesthetics
- Assign arbitrary dollar values to aesthetics without owner input
- Choose the lowest first-cost alternative to avoid the conflict
Correct answer: Combine LCC results with a weighted evaluation matrix scoring non-monetary criteria
Value methodology pairs life cycle cost results with weighted matrices so monetary and non-monetary criteria both inform the selection.
CVS CVS Cost Analysis and Life Cycle Costing Questions and Answers 5
Two alternatives have unequal service lives: Alternative X lasts 15 years and Alternative Y lasts 20 years.
Which method allows a fair LCC comparison without extending the study period?