CCT Project Financial Analysis 2

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?

Accepted Answer

4.2 years

Answer

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?

Accepted Answer

Profitability Index

Answer

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?

Accepted Answer

$300,000

Answer

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

Question 4

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

Accepted Answer

Costs already incurred and unrecoverable

Answer

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?

Accepted Answer

Hurdle Rate

Answer

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

(CCT) Certified Cost Technician Practice Test