Financial Management for Project Managers Financial Ratio 3 — Questions and Answers
Question 1: A project manager calculates a gross profit margin of 40% on revenue of $250,000. What is the gross profit?
- $62,500
- $100,000 (Correct answer)
- $150,000
- $40,000
Correct answer: $100,000
Gross Profit = Gross Profit Margin × Revenue = 0.40 × $250,000 = $100,000.
Question 2: Which financial ratio is most useful for comparing the profitability of projects with different scales?
- Net income
- EBITDA
- Return on investment (ROI) (Correct answer)
- Total revenue
Correct answer: Return on investment (ROI)
ROI is expressed as a percentage, allowing fair comparison across projects of different sizes.
Question 3: A project has accounts receivable of $60,000 and annual credit sales of $360,000. What is the receivables turnover ratio?
- 6.0 (Correct answer)
- 0.17
- 60
- 3.0
Correct answer: 6.0
Receivables Turnover = Annual Credit Sales / Accounts Receivable = $360,000 / $60,000 = 6.0.
Question 4: If a project's days sales outstanding (DSO) is 45 days, what does this indicate?
- The project collects receivables in 45 days on average (Correct answer)
- The project has 45 days of inventory on hand
- The project's payable period is 45 days
- The project's net profit cycle is 45 days
Correct answer: The project collects receivables in 45 days on average
DSO measures the average number of days it takes to collect payment after a sale is made.
Question 5: A project manager compares two projects: Project A has an ROI of 18% and Project B has an ROI of 22%. Which statement is most accurate?
- Project A generates more total profit
- Project B is more cost-efficient per dollar invested (Correct answer)
- Project A has lower risk
- Project B has higher absolute returns
Correct answer: Project B is more cost-efficient per dollar invested
A higher ROI means Project B generates more return per dollar invested, indicating greater investment efficiency.
Question 6: What does a declining current ratio over multiple project reporting periods most likely indicate?
- Improving long-term solvency
- Growing revenue
- Deteriorating short-term liquidity (Correct answer)
- Increasing profitability
Correct answer: Deteriorating short-term liquidity
A declining current ratio suggests that current liabilities are growing faster than current assets, signaling liquidity stress.
Question 7: A project has total debt of $400,000 and total equity of $600,000. How is this debt-to-equity ratio best interpreted?
- The project is highly leveraged with risk concerns
- The project is conservatively financed with more equity than debt (Correct answer)
- The project is insolvent
- The project has no liquidity risk
Correct answer: The project is conservatively financed with more equity than debt
A D/E ratio of 0.67 means equity exceeds debt, indicating conservative financing with moderate leverage.
Financial Management for Project Managers Financial Ratio 3
A project manager calculates a gross profit margin of 40% on revenue of $250,000.
What is the gross profit?