Question 1

Which statement about the Analytical Hierarchy Process is FALSE?
A)AHP scores are significant.
B)AHP can be used to capture choice options that do not yield positive outcomes.
C)AHP can improve the process of developing project proposals.
D)AHP groups subcriteria that share the weight of a common higher-level criterion.

Accepted Answer

AHP is used to prioritize options based on a set of criteria and is designed to capture positive outcomes. It does not consider options that do not yield positive outcomes.

Question 2

Which of these statements about internal rate of return analysis is best?
A)If the IRR is less than the company's required rate of return,the project is worth funding.
B)Projects having lower IRR are generally superior to those having higher IRR.
C)IRR and NPV calculations always make the same investment recommendations.
D)If net outflows follow a period of net inflows,IRR may give conflicting results.

Accepted Answer

If net outflows follow a period of net inflows, the project may have multiple IRRs or no real IRR, which can lead to conflicting results. Option A is incorrect because if the IRR is less than the required rate of return, the project is not worth funding. Option B is incorrect because projects with higher IRR are generally superior to those with lower IRR. Option C is incorrect because IRR and NPV may recommend different investments, especially when there are mutually exclusive projects.

Question 3

The pairwise comparison approach:
A)is a method to split the weights assigned to subcriteria.
B)is a method to compare pairs of hierarchies prior to any further analysis.
C)is a means of achieving all project objectives within the allocated time frame.
D)may be used instead of AHP if time is limited.

Accepted Answer

Pairwise comparison is a method used to assign weights to subcriteria by comparing them in pairs to judge which is more important.

Question 4

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table? 
A)3.4 years
B)2.6 years
C)5.0 years
D)4.2 years

Accepted Answer

To calculate the discounted payback period, we need to calculate the present value of each cash flow and add them up until we reach the initial investment.

Year 1: $100/(1.1*1.04)^1 = $85.47
Year 2: $150/(1.1*1.04)^2 = $117.51
Year 3: $200/(1.1*1.04)^3 = $148.32
Year 4: $250/(1.1*1.04)^4 = $178.21
Year 5: $300/(1.1*1.04)^5 = $207.50

Total present value at the end of year 4 = $627.51
Amount remaining to be recouped at the end of year 4 = $200 - $178.21 = $21.79
Discounted payback period = 4 + $21.79/$207.50 = 4.1 years

Therefore, the discounted payback period for this project is 5 years, which exceeds the company's maximum payback period of 4 years. Hence, this project should not be undertaken. The answer is C.

Question 5

The profile model plots a graph on a(n):
A)perception-reality pair of axes.
B)risk-return pair of axes.
C)efficiency-effectiveness pair of axes.
D)Saxon-Norman pair of axes.

Accepted Answer

The profile model is used to plot a graph representing the relationship between risk and return. Therefore, a risk-return pair of axes is the best choice for the profile model. The other options listed (perception-reality, efficiency-effectiveness, Saxon-Norman) do not relate to the purpose of the profile model.

Question 6

A project manager is using the internal rate of return method to make the final decision on which project to undertake.Which of these four projects has the highest internal rate of return?
A)$100,000 initial outlay with $10,000 cash inflows during the first two years,$20,000 during the third and fourth years,and $30,000 during the fifth year
B)$100,000 initial outlay with a $5,000 cash inflow during the first year,$15,000 cash inflow during the second year,and $25,000 cash inflows during years three through five
C)$75,000 initial outlay with a $5,000 cash inflow during the first year,increasing by $5,000 per year through the fifth year
D)$50,000 initial outlay with $5,000 cash inflows during the first two years,$15,000 during the third and fourth years,and $20,000 during the fifth year

Accepted Answer

Project D has the highest Internal Rate of Return (IRR) because it requires the lowest initial investment while still generating significant cash inflows, especially in the later years. This combination typically results in a higher IRR compared to projects with higher initial outlays or lower cash inflows.

Question 7

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the non-discounted payback of a project that has cash flows as shown in the table? 
A)3.5 years
B)2.6 years
C)5.0 years
D)4.2 years

Accepted Answer

The answer of A project manager is using the payback...

Question 8

The efficient frontier in project management is the set of portfolio options that offer:
A)a minimum return for a minimum risk.
B)a minimum return for a maximum risk.
C)a maximum return for a minimum risk.
D)a maximum return for a maximum risk.

Accepted Answer

The efficient frontier is all about finding a balance between risk and return. Therefore, when it comes to the options available in project management, the best choice would be the one that offers a maximum return for a minimum risk. This ensures that you are getting the most reward possible for the least amount of risk taken on. The other choices (A, B, and D) are not ideal because they either prioritize minimizing risk over maximizing returns or vice versa, leading to a suboptimal portfolio.

Question 9

Which of these statements about valuation models is NOT correct?
A)NPV employs a weighted average cost of capital discount rate that reflects potential reinvestment.
B)IRR and NPV calculations typically make the same investment recommendations only when the projects are independent of each other.
C)If cash flows are not normal,IRR may arrive at multiple solutions.
D)IRR is a more robust determinant of project viability than NPV.

Accepted Answer

The statement "IRR is a more robust determinant of project viability than NPV" is not correct. Both IRR and NPV are important and complementary valuation models that provide different insights into the profitability and viability of a project. While IRR helps assess the rate of return of an investment, NPV considers the absolute value of the investment in today's dollars, taking into account the time value of money and the cost of capital. Therefore, both models should be used together to assess the feasibility and risks of a project.

Question 10

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the NPV of a project that has cash flows as shown in the table? 
A)$264,252
B)$324,606
C)$442,242
D)$398,780

Accepted Answer

The answer of A project manager is using the net...

Question 11

Between projects A and B,project A will be considered a superior financial undertaking if it has:
A)a shorter payback period than project B.
B)a lower average rate of return than project B.
C)a lower net present value than project B.
D)a longer payback period than project B.

Accepted Answer

A shorter payback period means that the project will recoup its initial investment more quickly, which is generally seen as a positive financial aspect. Therefore, project A being superior to project B in terms of financial undertaking if it has a shorter payback period.

Question 12

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table? 
A)3.5 years
B)5.3 years
C)4.6 years
D)4.2 years

Accepted Answer

The answer of A project manager is using the payback...

Question 13

A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows.If the company is employing the net present value criterion,which project should they choose?
A)$25,000 in year 1;$15,000 in year 2;$10,000 in year 3;and $5,000 in year 4
B)$5,000 in year 1;$5,000 in year 2;$20,000 in year 3;and $30,000 in year 4
C)$15,000 in year 1;$15,000 in year 2;$15,000 in year 3;and $15,000 in year 4
D)$5,000 in year 1;$5,000 in year 2;$25,000 in year 3;and $25,000 in year 4

Accepted Answer

The answer of A company facing an interest rate of...

Question 14

Net present value is being used to break the tie among four otherwise equal projects.If the interest rate is 4%,which of these anticipated four-year flows would yield the greatest net present value?
A)$10,000 in year 1;$11,000 in year 2;$12,000 in year 3;and $13,000 in year 4
B)$13,000 in year 1;$12,000 in year 2;$11,000 in year 3;and $10,000 in year 4
C)$10,000 in year 1;$10,000 in year 2;$13,000 in year 3;and $13,000 in year 4
D)$11,000 in year 1;$11,000 in year 2;$12,000 in year 3;and $12,000 in year 4

Accepted Answer

The net present value (NPV) is higher when cash flows are received earlier, as they can be reinvested sooner. Option B, with the highest cash flows in the earliest years, would yield the greatest NPV at a 4% interest rate.

Question 15

Which statement about the use of the profile model is best?
A)The profile model requires careful calculation of the percentage risk for each possible project.
B)The scale used for the profile model can be any two numerical variables that a company deems important.
C)The efficient frontier in the profile model is where return is 100% (or greater)and risk is 0%.
D)For a given level of risk,a positive move on the return axes would indicate a superior project.

Accepted Answer

Option D correctly explains how the profile model is used. It involves plotting projects on a graph with risk on the x-axis and return on the y-axis. For a given level of risk, a positive move on the return axes would indicate a superior project. The efficient frontier is the set of projects that offer the greatest return for a given level of risk, and it is not necessarily at a maximum return of 100%. Options A and B are incorrect, as the profile model does not require calculating percentage risks, and the scale used for the model is limited to two numerical variables that represent risk and return. Option C is also incorrect, as it makes an incorrect statement about the efficient frontier.

Question 16

A project manager is using the internal rate of return method to make the final decision on which project to undertake.Which of these four projects has the highest internal rate of return?
A)$25,000 initial outlay with $10,000 cash inflows during the following five years
B)$12,500 initial outlay with $10,000 cash inflows during the following five years
C)$25,000 initial outlay with $5,000 cash inflows during the following five years
D)$12,500 initial outlay with $5,000 cash inflows during the following five years

Accepted Answer

Project B has the highest internal rate of return (IRR) because it requires the lowest initial investment ($12,500) while generating the same annual cash inflows ($10,000) as project A for five years, leading to a quicker and higher return on investment compared to the other options.

Question 17

The Analytic Hierarchy Process is being employed in a project selection decision.One major criteria,cost,receives a weighting value of 40%,which is split into short term (50%),intermediate term (30%),and long term (20%).Which of these statements is best?
A)Short term,intermediate term,and long term must receive overall weightings that total 100%.
B)There must be at least one other major criteria that has 40% weighting.
C)Intermediate-term cost receives a weighting of 12%.
D)Long-term cost receives an overall weighting of 80%.

Accepted Answer

Intermediate-term cost receives a weighting of 12% because it is 30% of the 40% total cost weighting (0.3 * 0.4 = 0.12 or 12%).

Question 18

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the NPV of a project that has cash flows as shown in the table? 
A)$564.955
B)$642,586
C)$431,667
D)$322,320

Accepted Answer

The answer of A project manager is using the net...

Question 19

The Analytical Hierarchy Process is used to decide among three projects that we'll call A,B,and C.The total score for project A is .650,for project B is .514,and for project C is .321.Which of the following statements is best?
A)Project A is twice as good as project C.
B)The analysis must be incorrect because the total scores should sum to 1.00.
C)The analysis must be incorrect because there are two total scores that exceed 0.50.
D)The analysis must be incorrect because project C's total score is odd.

Accepted Answer

The total scores obtained from the Analytical Hierarchy Process cannot be directly interpreted as proportions or percentages because they are not based on a fixed scale. Therefore, it is not appropriate to say that project A is twice as good as project C. However, we can say that project A has a higher score than project B, which has a higher score than project C, indicating that project A is the preferred option among the three. The fact that the total scores do not sum to 1.00 or that there are multiple scores above 0.50 does not invalidate the analysis, as long as the method was correctly applied. Similarly, the fact that project C's score is odd has no relevance to the decision-making process.

Question 20

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the non-discounted payback of a project that has cash flows as shown in the table? 
A)3.4 years
B)2.6 years
C)5.0 years
D)4.2 years

Accepted Answer

The answer of A project manager is using the payback...

Quiz 3: Project Selection and Portfolio Management

Which statement about the Analytical Hierarchy Process is FALSE?

Which of these statements about internal rate of return analysis is best?

The pairwise comparison approach:

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table?

The profile model plots a graph on a(n) :

A project manager is using the internal rate of return method to make the final decision on which project to undertake.Which of these four projects has the highest internal rate of return?

The efficient frontier in project management is the set of portfolio options that offer:

Which of these statements about valuation models is NOT correct?

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the NPV of a project that has cash flows as shown in the table?

Between projects A and B,project A will be considered a superior financial undertaking if it has:

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the discounted payback of a project that has cash flows as shown in the table?

A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows.If the company is employing the net present value criterion,which project should they choose?

Net present value is being used to break the tie among four otherwise equal projects.If the interest rate is 4%,which of these anticipated four-year flows would yield the greatest net present value?

Which statement about the use of the profile model is best?

A project manager is using the internal rate of return method to make the final decision on which project to undertake.Which of these four projects has the highest internal rate of return?

The Analytic Hierarchy Process is being employed in a project selection decision.One major criteria,cost,receives a weighting value of 40%,which is split into short term (50%) ,intermediate term (30%) ,and long term (20%) .Which of these statements is best?

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following five years.What is the NPV of a project that has cash flows as shown in the table?

The Analytical Hierarchy Process is used to decide among three projects that we'll call A,B,and C.The total score for project A is .650,for project B is .514,and for project C is .321.Which of the following statements is best?