CCT Project Financial Analysis 2 — Questions and Answers
Question 1: 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?
- 3.2 years
- 4.2 years (Correct answer)
- 5.0 years
- 6.0 years
Correct answer: 4.2 years
Payback period = $500,000 / $120,000 = 4.17 years, approximately 4.2 years.
Question 2: Which financial metric measures the ratio of a project's net present value to its initial investment cost?
- Benefit-Cost Ratio
- Profitability Index (Correct answer)
- Return on Investment
- Internal Rate of Return
Correct answer: Profitability Index
The Profitability Index (PI) = NPV / Initial Investment, measuring value created per dollar invested.
Question 3: A project's revenues are $800,000, direct costs are $500,000, and indirect costs are $150,000. What is the gross margin?
- $150,000
- $300,000 (Correct answer)
- $450,000
- $650,000
Correct answer: $300,000
Gross margin = Revenue − Direct Costs = $800,000 − $500,000 = $300,000.
Question 4: In project financial analysis, what does 'sunk cost' refer to?
- Future costs that can be avoided
- Costs already incurred and unrecoverable (Correct answer)
- Variable costs tied to output
- Opportunity costs of capital
Correct answer: Costs already incurred and unrecoverable
Sunk costs are past expenditures that cannot be recovered and should not influence future decisions.
Question 5: Which term describes the minimum acceptable rate of return used to discount project cash flows in NPV analysis?
- Hurdle Rate (Correct answer)
- Payback Rate
- Inflation Rate
- Marginal Rate
Correct answer: Hurdle Rate
The hurdle rate (also called the discount rate or required rate of return) is the minimum return a project must achieve.
Question 6: 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?
- $247,934 (Correct answer)
- $272,727
- $300,000
- $330,000
Correct answer: $247,934
PV = $300,000 / (1.10)² = $300,000 / 1.21 = $247,934.
Question 7: What financial analysis technique compares the present value of all inflows to the present value of all outflows over a project's life?
- Payback Analysis
- Benefit-Cost Analysis (Correct answer)
- Break-Even Analysis
- Sensitivity Analysis
Correct answer: Benefit-Cost Analysis
Benefit-Cost Analysis compares the PV of benefits (inflows) to the PV of costs (outflows) to assess project viability.
CCT Project Financial Analysis 2
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?