CCT Project Financial Analysis 4 — Questions and Answers
Question 1: A project has total revenue of $1,200,000, total costs of $900,000, and a tax rate of 30%. What is the net income after tax?
- $90,000
- $210,000 (Correct answer)
- $270,000
- $300,000
Correct answer: $210,000
Pre-tax income = $1,200,000 − $900,000 = $300,000; Net income = $300,000 × (1 − 0.30) = $210,000.
Question 2: Which analysis technique assigns probability distributions to uncertain variables and runs thousands of simulations to assess project risk?
- Tornado Diagram Analysis
- Monte Carlo Simulation (Correct answer)
- Decision Tree Analysis
- Earned Value Analysis
Correct answer: Monte Carlo Simulation
Monte Carlo simulation uses random sampling from probability distributions to model the range of possible project outcomes.
Question 3: What does a negative Net Present Value (NPV) indicate about a project?
- The project exceeds its budget
- The project destroys value at the given discount rate (Correct answer)
- The project has a negative cash flow in year one
- The IRR is higher than the hurdle rate
Correct answer: The project destroys value at the given discount rate
A negative NPV means the project's discounted costs exceed its discounted benefits, indicating it destroys shareholder value.
Question 4: In lifecycle cost analysis, which cost category typically represents the largest portion of total ownership cost for complex infrastructure projects?
- Initial capital cost
- Operation and maintenance cost (Correct answer)
- Disposal and decommissioning cost
- Design and engineering cost
Correct answer: Operation and maintenance cost
For complex infrastructure, operation and maintenance costs over the project's life frequently exceed the initial capital investment.
Question 5: What is the purpose of a project's cash flow statement in financial analysis?
- To show the project's market value
- To track actual inflows and outflows of cash over time (Correct answer)
- To calculate depreciation schedules
- To determine the bid price for contracts
Correct answer: To track actual inflows and outflows of cash over time
A cash flow statement tracks when cash actually enters and leaves the project, which is essential for liquidity planning and NPV calculations.
Question 6: A project requires $1,000,000 capital, financed 60% by debt at 8% and 40% by equity at 15%. What is the WACC?
- 9.8%
- 10.8% (Correct answer)
- 11.5%
- 12.0%
Correct answer: 10.8%
WACC = (0.60 × 8%) + (0.40 × 15%) = 4.8% + 6.0% = 10.8%.
Question 7: Which term describes the rate at which a project's NPV changes in response to a change in the discount rate?
- Duration
- Financial Leverage
- NPV Sensitivity (Correct answer)
- Capital Elasticity
Correct answer: NPV Sensitivity
NPV sensitivity to the discount rate measures how much the project value changes per unit change in the required rate of return.
CCT Project Financial Analysis 4
A project has total revenue of $1,200,000, total costs of $900,000, and a tax rate of 30%.
What is the net income after tax?