Project Financial Analysis Flashcards

A project has an initial investment of $500,000 and generates annual cash flows of $120,000 for 6 years. What is the approximate payback period?

Answer: 4.2 years

Payback period = $500,000 / $120,000 = 4.17 years, approximately 4.2 years.

Which financial metric measures the ratio of a project's net present value to its initial investment cost?

Answer: Profitability Index

The Profitability Index (PI) = NPV / Initial Investment, measuring value created per dollar invested.

A project's revenues are $800,000, direct costs are $500,000, and indirect costs are $150,000. What is the gross margin?

Answer: $300,000

Gross margin = Revenue − Direct Costs = $800,000 − $500,000 = $300,000.

In project financial analysis, what does 'sunk cost' refer to?

Answer: Costs already incurred and unrecoverable

Sunk costs are past expenditures that cannot be recovered and should not influence future decisions.

Which term describes the minimum acceptable rate of return used to discount project cash flows in NPV analysis?

Answer: Hurdle Rate

The hurdle rate (also called the discount rate or required rate of return) is the minimum return a project must achieve.

A project generates $200,000 in Year 1 and $300,000 in Year 2. Using a 10% discount rate, what is the approximate present value of Year 2 cash flow?

Answer: $247,934

PV = $300,000 / (1.10)² = $300,000 / 1.21 = $247,934.

What financial analysis technique compares the present value of all inflows to the present value of all outflows over a project's life?

Answer: Benefit-Cost Analysis

Benefit-Cost Analysis compares the PV of benefits (inflows) to the PV of costs (outflows) to assess project viability.