AACE International CCP Exam - Topic 2 Question 6 Discussion

Actual exam question for AACE International's CCP exam

Question #: 6
Topic #: 2

[All CCP Questions]

A used concrete pumping truck can be purchased for $125,000. The operation costs are expected to be $65,000 the first year and increase 5% each year thereafter. As a result of the purchase, the company will see an increase in income of $100,000 the first year and 5% more each subsequent year. The company uses straight-line depreciation. The truck will have a useful life of five (5) years and no salvage value. Management would like to see a 10% return on any investment. The company's tax rate is 28%.

Assuming the average life span of a lithium battery is two years and is normally distributed with a standard deviation of two months, what is the probability the battery will last between 20 months and 26 months?

A82%

B75%

C90%

D84%

Show Suggested Answer

Suggested Answer: D

Given that the average life span of the lithium battery is 24 months with a standard deviation of 2 months, we need to calculate the probability that the battery will last between 20 and 26 months.

Using the Z-score formula:

Z=XZ = frac{X - mu}{sigma}Z=X

For 20 months: Z=20242=2Z = frac{20 - 24}{2} = -2Z=22024=2

For 26 months: Z=26242=1Z = frac{26 - 24}{2} = 1Z=22624=1

Looking up these Z-scores in the standard normal distribution table:

Z = -2 corresponds to approximately 2.28%

Z = 1 corresponds to approximately 84.13%

The probability that the battery will last between 20 and 26 months is approximately 84%.

by Honey at Aug 25, 2024, 12:40 AM

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Elina

3 months ago

Totally agree, 84% sounds about right for the battery!

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Delmy

4 months ago

Wait, how can we be sure about that battery lifespan?

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Alberto

4 months ago

10% return seems reasonable for this investment.

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Avery

4 months ago

I think the operation costs are too high for the first year.

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Billye

4 months ago

The truck costs $125k and has a 5-year life.

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Aliza

5 months ago

I feel like the answer might be around 84%, but I’m not completely confident in my calculations.

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Cory

5 months ago

If I remember correctly, we need to find the z-scores for 20 and 26 months, then use the standard normal table to find the probabilities.

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Donette

5 months ago

I think we did a similar question in class about lifespan and standard deviation, but I can't recall the exact steps to find the probability.

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Ty

5 months ago

I remember we practiced calculating probabilities with normal distributions, but I'm not sure how to apply it here with the battery lifespan.

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Ammie

5 months ago

Wait, what? A concrete pumping truck and a lithium battery? This question is all over the place. I'm not sure I can even begin to tackle this. Maybe I should move on and come back to it later.

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Becky

5 months ago

Alright, I've got this. The key is to focus on the cash flows, net present value, and the normal distribution for the battery life. I'm confident I can get the right answer.

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Cathrine

5 months ago

Okay, let's see here. We have a used concrete pumping truck, operation costs, income increases, depreciation, and a required 10% return on investment. I think I can work through this step-by-step.

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Nobuko

5 months ago

Hmm, this question seems a bit tricky. I'll need to carefully read through the details and make sure I understand the key information before attempting to solve it.

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Wilbert

5 months ago

This looks like a complex finance and probability problem. I'll need to break it down into manageable parts and make sure I'm applying the right formulas and calculations.

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Yuette

5 months ago

Ah yes, I remember learning about this case. The key is that it involved a man being sexually harassed by other men, which was an uncommon scenario at the time. I'll make sure to highlight that point in my response.

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