Project Financial Analysis Flashcards

What is the Weighted Average Cost of Capital (WACC) primarily used for in project financial analysis?

Answer: Discounting future project cash flows

WACC represents the blended cost of equity and debt financing and is commonly used as the discount rate for NPV calculations.

A project has fixed costs of $200,000, a selling price of $50 per unit, and variable costs of $30 per unit. What is the break-even volume?

Answer: 10,000 units

Break-even = Fixed Costs / (Price − Variable Cost) = $200,000 / ($50 − $30) = 10,000 units.

Which of the following best describes 'opportunity cost' in project financial decision-making?

Answer: The return foregone from the next best alternative investment

Opportunity cost is the forgone benefit of the best alternative not chosen when committing resources to a project.

In a sensitivity analysis, which variable is typically analyzed by changing it while holding all other inputs constant?

Answer: One variable at a time

Sensitivity analysis tests how the project outcome changes when one input variable is altered while others remain fixed.

A project's NPV is positive at a 12% discount rate but negative at 18%. Where does the IRR lie?

Answer: Between 12% and 18%

IRR is the discount rate where NPV equals zero, so it must fall between the rates where NPV is positive and negative.

Which depreciation method allocates equal expense amounts over the useful life of an asset?

Answer: Straight-Line

Straight-line depreciation spreads the asset's cost evenly across its useful life: (Cost − Salvage) / Years.

What is the financial impact of a project delay when future cash flows remain unchanged but arrive one period later?

Answer: NPV decreases because cash flows are worth less in present value terms

Delaying cash flows pushes them further into the future, reducing their present value and therefore the project's NPV.