CCT Project Financial Analysis 5

Question 1

What is the modified internal rate of return (MIRR) designed to address compared to the conventional IRR?

Accepted Answer

The assumption that interim cash flows are reinvested at the project's IRR

Answer

MIRR corrects the IRR's unrealistic assumption that interim cash flows are reinvested at the IRR itself, instead using the cost of capital.

Question 2

In project financial analysis, what does 'working capital' represent?

Accepted Answer

Current assets minus current liabilities needed for project operations

Answer

Working capital is the difference between current assets and current liabilities, representing the short-term liquidity needed to run the project.

Question 3

A project has revenues of $500,000, operating costs of $300,000, depreciation of $50,000, and a tax rate of 25%. What is the operating cash flow?

Accepted Answer

$162,500

Answer

Operating income = $500k − $300k − $50k = $150k; Tax = $150k × 25% = $37.5k; Net income = $112.5k; OCF = $112.5k + $50k = $162,500.

Question 4

Which financial ratio measures a project's ability to cover its debt service from operating earnings?

Accepted Answer

Debt Service Coverage Ratio (DSCR)

Answer

DSCR = Net Operating Income / Debt Service; a ratio above 1.0 indicates sufficient cash flow to meet debt obligations.

Question 5

What is the primary limitation of using the payback period as the sole financial evaluation criterion for a project?

Accepted Answer

It ignores the time value of money and cash flows beyond the payback period

Answer

The simple payback period ignores both the time value of money and any cash flows that occur after the payback period is reached.

(CCT) Certified Cost Technician Practice Test