ACAP Economic Analysis and Life Cycle Costing 2 — Questions and Answers
Question 1: In economic analysis of Army system alternatives, what is 'cost-effectiveness analysis' used for?
- Comparing alternatives when benefits cannot be monetized, by relating costs to non-monetary measures of effectiveness (Correct answer)
- Calculating the return on investment for a weapon system
- Determining whether a program's benefits exceed its costs in dollar terms
- Ranking alternatives by their NPV of costs alone
Correct answer: Comparing alternatives when benefits cannot be monetized, by relating costs to non-monetary measures of effectiveness
Cost-effectiveness analysis is used when benefits like combat capability cannot be expressed in dollars, allowing comparison of how much capability each dollar of investment buys.
Question 2: What is 'depreciation' in the context of Army economic analysis, and is it typically included in DoD life cycle cost estimates?
- Depreciation is the reduction in asset value over time; it is generally NOT included in DoD LCC estimates because the focus is on cash outlays, not accounting entries (Correct answer)
- Depreciation IS included as a recurring O&S cost in all Army LCC estimates
- Depreciation replaces procurement cost in O&S phase calculations
- Depreciation applies only to civilian-acquired systems, not military
Correct answer: Depreciation is the reduction in asset value over time; it is generally NOT included in DoD LCC estimates because the focus is on cash outlays, not accounting entries
DoD cost estimates focus on budget authority and outlays (cash costs) rather than accounting depreciation, which is an accrual concept not relevant to budget planning.
Question 3: What is a 'Cost-Benefit Analysis (CBA)' and when is it required for Army decisions?
- An analysis comparing total discounted costs to total discounted benefits to determine whether an investment is economically justified; required for significant Army business cases and some acquisition decisions (Correct answer)
- An analysis of a contractor's proposed costs versus the government's should-cost estimate
- A comparison of the procurement cost of two competing systems
- A review of prior program costs versus planned budgets
Correct answer: An analysis comparing total discounted costs to total discounted benefits to determine whether an investment is economically justified; required for significant Army business cases and some acquisition decisions
CBAs are required by OMB Circular A-94 for major federal investments and help Army decision-makers determine whether the economic benefits of a program justify its full life cycle cost.
Question 4: What is the concept of 'sunk cost' and how should it affect Army acquisition decisions?
- Sunk costs are past expenditures that cannot be recovered; they should NOT influence future investment decisions, which should be based only on future costs and benefits (Correct answer)
- Sunk costs represent the value of prior investment and should always be recovered before terminating a program
- Sunk costs are included in life cycle cost estimates to reflect total program investment
- Sunk costs must be reported to Congress before milestone decisions
Correct answer: Sunk costs are past expenditures that cannot be recovered; they should NOT influence future investment decisions, which should be based only on future costs and benefits
Economic rationality requires that sunk costs be ignored in forward-looking decisions; only incremental future costs and benefits should determine whether to continue or terminate a program.
Question 5: What is 'inflation' as it applies to Army cost analysis, and what index is commonly used to adjust costs?
- Inflation is the general rise in prices over time; the DoD uses the DoD Inflation Composite Rates from the OSD Comptroller's Green Book to adjust costs (Correct answer)
- Inflation is the increase in contractor costs due to wage growth only; it is captured using the Employment Cost Index (ECI)
- Inflation is applied only to O&S costs, not development or procurement
- Inflation is ignored in Army estimates because DoD uses constant-year dollars
Correct answer: Inflation is the general rise in prices over time; the DoD uses the DoD Inflation Composite Rates from the OSD Comptroller's Green Book to adjust costs
DoD analysts use the Green Book inflation rates published annually by OSD Comptroller to convert between base-year and then-year dollars for budget submissions and life cycle estimates.
Question 6: In Army economic analysis, what does 'breakeven analysis' determine?
- The point at which the cumulative savings of a more expensive alternative exceed its additional upfront cost compared to the baseline (Correct answer)
- The production quantity at which unit cost equals the program budget
- The year at which the program's costs are fully funded
- The number of units needed to achieve the required military capability
Correct answer: The point at which the cumulative savings of a more expensive alternative exceed its additional upfront cost compared to the baseline
Breakeven analysis identifies when the total cost of a higher-upfront-cost option becomes equal to and then lower than the baseline, helping justify investments that pay off over time.
ACAP Economic Analysis and Life Cycle Costing 2
In economic analysis of Army system alternatives, what is 'cost-effectiveness analysis' used for?