PK0-005 Project Management Concepts Practice Question

Answer analysis

Option-by-option breakdown

For each option: why learners choose it and why it is or isn't the right answer here.

• ✗

  Neither project should be selected

  Why it's wrong here

  NPV is the stated selection criterion, and Project A's $50,000 exceeds Project B's $40,000, so a positive-NPV option exists. Rejecting both is tempting when payback periods dominate thinking, but payback is a secondary liquidity measure; it would be correct only if both projects had negative NPV.

• ✗

  Project B because it has a shorter payback period

  Why it's wrong here

  Payback period measures how quickly outlay is recovered and ignores cash flows after that point, so it cannot rank projects by net present value. It is tempting because shorter recovery feels safer. NPV is the stated criterion, and Project A's higher NPV of $50,000 makes it the selection.

• ✗

  Both projects are equally good

  Why it's wrong here

  The NPVs differ by $10,000, so the projects are not equivalent on the stated criterion. Equal ranking is tempting when both NPVs are positive and both payback periods are short, but NPV is an absolute dollar measure; it would apply only if the two NPV figures were identical.

• ✓

  Project A because it has a higher NPV

  Why this is correct

  Project A delivers the greater net present value, $50,000 against $40,000, so it adds more value once future cash flows are discounted to present terms. The stem explicitly asks for selection based on NPV, making payback period irrelevant here despite Project B's faster two-year recovery.