Financial Management for Project Managers Capital Budgeting 1

Question 1

Which capital budgeting technique calculates the time required for cumulative project cash inflows to equal the initial investment?

Accepted Answer

Payback Period

Answer

The Payback Period measures how long it takes for a project's cumulative cash inflows to recover the initial investment cost.

Question 2

Net Present Value (NPV) is considered positive and acceptable when:

Accepted Answer

NPV is greater than zero

Answer

A positive NPV means the project generates more value than its cost of capital, making it financially worthwhile to pursue.

Question 3

The Internal Rate of Return (IRR) is best defined as:

Accepted Answer

The discount rate at which NPV equals zero

Answer

IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero.

Question 4

A project manager is comparing two projects using the Profitability Index (PI). Project A has a PI of 1.3 and Project B has a PI of 0.9. Which should be selected?

Accepted Answer

Project A because PI > 1 indicates value creation

Answer

A PI greater than 1.0 means the project creates more value than it costs, so Project A with PI of 1.3 is acceptable while Project B at 0.9 is not.

Question 5

Which of the following is a limitation of the Payback Period method?

Accepted Answer

It ignores the time value of money

Answer

The traditional Payback Period does not discount future cash flows, so it ignores the time value of money.

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Practice Test

Financial Management for Project Managers Capital Budgeting 1