ACAP Economic Analysis and Life Cycle Costing 1 — Questions and Answers
Question 1: What is the purpose of a Life Cycle Cost (LCC) estimate for an Army acquisition program?
- To capture all costs from concept through disposal to support investment decisions and budget planning (Correct answer)
- To determine the unit production cost of the end item
- To establish the contractor's fee structure over the program's life
- To estimate only the development and procurement costs of the system
Correct answer: To capture all costs from concept through disposal to support investment decisions and budget planning
LCC encompasses research and development, procurement, operations and support, and disposal costs, giving decision-makers a complete financial picture of the investment.
Question 2: In Army economic analysis, what does 'Net Present Value (NPV)' measure?
- The current value of a stream of future costs and benefits discounted to a common reference date (Correct answer)
- The total undiscounted cost of a program over its life
- The difference between then-year and base-year costs
- The value of Army assets as reported on the balance sheet
Correct answer: The current value of a stream of future costs and benefits discounted to a common reference date
NPV discounts future cash flows to their present worth using a discount rate, enabling comparison of alternatives with different cost and benefit timing profiles.
Question 3: What discount rate does OMB Circular A-94 prescribe for most federal economic analyses of programs involving real costs and benefits?
- 7% real discount rate (Correct answer)
- 3% real discount rate
- 10% real discount rate
- The current Treasury borrowing rate
Correct answer: 7% real discount rate
OMB Circular A-94 specifies a 7% real discount rate as the base case for cost-benefit analysis of federal investments, reflecting the opportunity cost of capital in the private sector.
Question 4: What is 'Operations and Support (O&S) cost' in Army life cycle costing?
- All costs incurred after fielding to operate, maintain, sustain, and support the system throughout its service life (Correct answer)
- Costs for developing the operations and support manuals
- Sustainment costs covered under a contract with the original manufacturer
- Costs for training Army personnel to use the new system
Correct answer: All costs incurred after fielding to operate, maintain, sustain, and support the system throughout its service life
O&S costs typically represent the largest portion of LCC (often 60–80%) and include personnel, fuel, maintenance, repairs, and other sustainment activities throughout the system's operational life.
Question 5: Which Army document formally establishes the life cycle cost estimate used to support milestone decision reviews?
- Program Life Cycle Cost Estimate (PLCCE) (Correct answer)
- Program Objective Memorandum (POM)
- Acquisition Program Baseline (APB)
- Defense Acquisition Executive Summary (DAES)
Correct answer: Program Life Cycle Cost Estimate (PLCCE)
The PLCCE is the official cost estimate document that captures all life cycle costs and is reviewed at milestone decisions to ensure funding adequacy.
Question 6: What is the 'Army Cost Position (ACP)' and how does it relate to the PLCCE?
- The ACP is the Army's official cost position for a program, typically derived from the ACEA's independent estimate and used as the basis for budget submissions (Correct answer)
- The ACP is a contractor-proposed cost used to negotiate contract prices
- The ACP is the cumulative cost charged to a program's appropriation
- The ACP is identical to the program office's own cost estimate
Correct answer: The ACP is the Army's official cost position for a program, typically derived from the ACEA's independent estimate and used as the basis for budget submissions
The Army Cost Position represents the Army's official view of expected costs for budget and planning purposes, and is developed independently to provide objective oversight of program office estimates.
ACAP Economic Analysis and Life Cycle Costing 1
What is the purpose of a Life Cycle Cost (LCC) estimate for an Army acquisition program?