Back to Agile EVM (Earned Value Management)

Financial Analysis Techniques: NPV and ROI

5 minutes 5 Questions

Financial Analysis Techniques like Net Present Value (NPV) and Return on Investment (ROI) are used to determine the value and return of a project. In the context of Agile EVM, these techniques can be used to estimate the value of the work done and the return achieved from a given increment of work.…

Test mode:
Start practice test
PMI-ACP - Financial Analysis Techniques: NPV and ROI Example Questions

Test your knowledge of Financial Analysis Techniques: NPV and ROI

Question 1

A project costed your company $9,000,000 and is expected to yield a return of $11,000,000 over the period of six years. The discount rate applied is 5%. What would be the Net Present Value (NPV) of this project?

Correct Answer: Approximately $1,320,000

The Net Present Value (NPV) of the project is calculated by finding the difference between the present value of cash inflows and the present value of cash outflows over a period of time. The cash inflow is expected to be $11,000,000 over six years while the project cost (cash outflow) is $9,000,000. To find the present value, we have to discount the future cash inflows back to today's value by applying the discount rate, which is given as 5%. Without using specific formulas, the concept is that $11,000,000 received over a period of six years is worth less today due to the time value of money, and this reduction is calculated using the 5% discount rate. After performing those calculations, the NPV turns out to be approximately $1,320,000. This means the project is worth undertaking, as it is expected to generate more returns than costs, by approximately $1,320,000 in today's money. The other provided answers, approximately $2,000,000, approximately $1,000,000, and approximately $3,000,000 are not correct based on the calculation of NPV using the given parameters.

Question 2

A project with initial costs of $10,000 is projected to generate profits of $3,000 annually over 5 years. Which of these is closest to the NPV using a discount rate of 10%?

Correct Answer: $1,139

We are tasked with calculating the Net Present Value (NPV) of a project with an initial cost of USD 10,000, generating profits of USD 3,000 per year for 5 years, and using a discount rate of 10 percent. To calculate the NPV, we need to add up the discounted profits per year and subtract the initial cost. Using the discount rate, we discount the annual profits as they will be worth less in the future. By following these steps we will find that the NPV comes closest to USD 1,139. The answers USD 5,000, USD 10,000, and USD 15,000 are incorrect because they do not correctly apply the formula of NPV which takes into account the initial costs and the discounted future profits.

Question 3

Your team has invested $6,000,000 in a project. The anticipated yearly return is $2,000,000 within the next four years. Given your firm's target ROI is 40%, is this a wise investment?

Correct Answer: No

The expected return on this investment is $2,000,000 for each of four years to a total of $8,000,000 in returns. But the investment is $6,000,000. ROI (Return on Investment) is calculated by (Total Return-Investment)/Investment. So ROI for this project would be ($8,000,000 - $6,000,000)/$6,000,000 which equals to 33.33%. It is less than the firm's target ROI of 40%, hence the 'No' answer, even though the investment will generate a net gain, it does not meet the company's ROI objectives. The 'Yes' answer would be incorrect as the ROI does not meet the firm's target. And there is sufficient information to make this calculation, hence 'Insufficient Information' is also incorrect. 'Depends on the market situation' would be irrelevant in the given context as financial data for the project and the firm's ROI objective is provided.

More Financial Analysis Techniques: NPV and ROI questions
10 questions (total)
Start 10 question test