Life Cycle Costing & Total Cost of Ownership Flashcards
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Total Cost of Ownership (TCO) differs from a simple purchase price analysis primarily because TCO:
Answer: Includes all direct and indirect costs associated with acquiring, operating, and retiring an asset
TCO captures both visible costs (purchase price, maintenance) and hidden costs (training, downtime, disposal) to reveal the true economic burden of ownership.
In LCCA, a 'study period' is BEST described as:
Answer: The time span over which alternatives are compared, encompassing the planning horizon
The study period is selected by the analyst to match the decision-making horizon and must be identical for all alternatives being compared.
When the real discount rate is used in LCCA (as opposed to the nominal rate), future cost estimates should be expressed in:
Answer: Current (constant) dollars, excluding general inflation
The real discount rate already strips out general inflation, so cost estimates in constant (today's) dollars are appropriate — using nominal dollars with a real rate would double-count inflation.
Sensitivity analysis in Life Cycle Cost studies is performed to:
Answer: Identify which input variables most significantly affect the LCC outcome
Sensitivity analysis varies key assumptions (discount rate, useful life, energy prices) to determine which variables drive LCC decisions most, revealing where estimates must be most accurate.
Which of the following is an example of an indirect cost that should be included in a Total Cost of Ownership analysis for manufacturing equipment?
Answer: Lost production revenue during unplanned downtime
Lost production during downtime is a hidden indirect cost of ownership that TCO analysis captures but a simple purchase-price comparison would miss.
The breakeven point in an LCCA comparing two alternatives is reached when:
Answer: The cumulative LCC of both alternatives is equal at a specific point in time
The breakeven point marks the time or usage level at which the alternative with a higher initial cost has accumulated enough savings to equal the cumulative LCC of the lower-cost alternative.
According to LCCA best practices, replacement costs for a major component within the study period should be:
Answer: Treated as a single future cost and discounted to present value
Replacement costs occurring at a known future date are discounted back to present value using the Single Present Worth factor so they can be added to other LCC elements consistently.