PM Test Center

Megan is working with her finance department to determine depreciation for a warehouse forklift that was purchased. She is told that accelerated depreciation will be used. If the forklift cost $50,000 and Megan wants to spread the depreciation over five years, which of the following will the first year most likely be?

A. $5,000
B. $8,000
C. $10,000
D. $15,000

Answer: D. $15,000
If Megan was asked to use straight line depreciation, then the answer would be $10,000, which is a simple average. For accelerated depreciation, the first year will be higher than the average and incrementally decrease over time. As a result, the first year depreciation could only be $15,000 from this list since it is the only value greater than $10,000.

While determining which project to pursue, your management decides to use net present value (NPV) as the key criteria. If the NPV for Project X is 12,000 and the NPV for Project Y is 15,000, which project should be chosen?

A. Project X
B. Project Y
C. Either can be chosen since the numbers are so close
D. NPV cannot be used to chose projects

Answer: B. Project Y
The net present value (NPV) is basically the value of total benefits minus the costs. It is can be used to determine which project to embark on. If you are comparing project using NPV, the higher the value, the better.

While determining which project to pursue, your management decides to use internal rate of return (IRR) as the key criteria. If the IRR for Project X is 10% and the IRR for Project Y is 8%, which project should be chosen?

A. Project X
B. Project Y
C. Either can be chosen since the numbers are so close
D. IRR cannot be used to chose projects

Answer: A. Project X
The internal rate of return (IRR), in simple terms, is the rate at which inflows and outflows are equal. Often times, it is used to determine which project to embark on. If you are comparing projects using IRR, the higher the percentage, the better.

There are two projects being evaluated but only one can be undertaken. Your finance department decides to use Benefit Cost Ratio (BCR) to help make the decision. Before they even perform the BCR, they inform you that a possible outcome is that neither is a good fit for the organization and you may have to find another solution. After completing their analysis they determine that Project A has a BCR of 0.8 and Project B has a BCR of 0.6. Based on their BCR scores, you should:

A. Choose Project A
B. Choose Project B
C. Choose neither and seek alternative projects
D. Ask for more information to make a decision

Answer: C. Choose neither and seek alternative projects
A Benefit Cost Ratio (BCR) weighs benefits against costs. A BCR of 1.0 means that benefits equal costs. Anything over 1.0 represents that benefits outweigh the costs. For instance, a BCR of 3.5 means that benefits are 3.5 times the costs. Conversely, a BCR of under 1.0 shows that the costs outweigh the benefits. Unless the project must be completed, such as meeting a regulatory requirement, a BCR under one should not be started. In this example, both projects have a BCR of under 1.0.

During the project selection stage, you learn that the value of Project A is $100,000 and the value of Project B is $75,000. Ultimately, Project A was chosen. As a result, the opportunity cost of that decision is:

A. $100,000
B. $75,000
C. $25,000
D. $175,000

Answer: B. $75,000
The opportunity cost is simply the value of the project not chosen. There is no math involved.