Quick Answer
The answer is Proposal A, because its NPV of $150,000 is the most financially sound criterion for project selection. Net present value directly measures the project’s value creation in today’s dollars by discounting future cash flows at the organization’s cost of capital of 10%, meaning a positive NPV confirms the project will generate wealth above the required return. On the CompTIA Project+ PK0-005 exam, this tests your understanding that NPV is the gold standard for comparing mutually exclusive projects during initiation, as it accounts for the time value of money and total profitability—unlike payback period, which ignores cash flows after recovery, or IRR, which can mislead when rates conflict. A common trap is choosing the highest IRR or shortest payback, but remember: NPV tells you the actual dollar gain. Memory tip: “NPV = Net Present Value, Net Positive Wealth.”
This PK0-005 practice question tests your understanding of project management concepts. Read the scenario carefully and evaluate each option against the stated constraints before committing to an answer. After answering, compare your reasoning against the explanation and wrong-answer breakdown below. Once you have made your selection, read the full explanation to reinforce the concept and understand why each distractor is designed to mislead on exam day.
A project is in the initiation phase, and the sponsor asks the project manager to evaluate which project to select among three proposals. Proposal A has an NPV of $150,000, Proposal B has a payback period of 18 months, and Proposal C has an internal rate of return (IRR) of 12%. The organization's cost of capital is 10%. Which project should be selected based on the most financially sound criterion?
Proposal C
Why wrong: IRR of 12% exceeds cost of capital, but without comparing NPV, it may not be the best choice.
Proposal B
Why wrong: Payback period is simple but does not consider profitability or time value of money.
Cannot determine without additional data
Why wrong: Sufficient data provided; NPV is definitive.
Proposal A
NPV of $150,000 is positive and directly indicates added value. It is the best criterion.
Answer choices
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
Proposal A
Proposal A has an NPV of $150,000, which is a direct measure of the project's value creation in today's dollars. Since NPV accounts for the time value of money and the organization's cost of capital (10%), a positive NPV indicates the project is expected to generate value above the required return. Among the options, NPV is the most financially sound criterion because it quantifies absolute wealth increase, unlike payback period (which ignores time value and cash flows after payback) or IRR (which can be misleading for mutually exclusive projects).
Key principle: Answer the scenario, not the keyword: identify the specific constraint before choosing the most familiar-sounding option.
Answer analysis
For each option: why learners choose it and why it is or isn't the right answer here.
Proposal C
Why it's wrong here
IRR of 12% exceeds cost of capital, but without comparing NPV, it may not be the best choice.
Proposal B
Why it's wrong here
Payback period is simple but does not consider profitability or time value of money.
Cannot determine without additional data
Why it's wrong here
Sufficient data provided; NPV is definitive.
Proposal A
Why this is correct
NPV of $150,000 is positive and directly indicates added value. It is the best criterion.
Related concept
Read the scenario before looking for a memorised answer.
Common exam traps
The trap here is that candidates may choose Proposal C (IRR) because 12% > 10% seems favorable, but they overlook that NPV is the superior criterion for selecting among mutually exclusive projects, as IRR can rank projects incorrectly when cash flow patterns differ or when the cost of capital changes.
Detailed technical explanation
Net Present Value (NPV) discounts all expected future cash flows back to their present value using the organization's cost of capital (10%), then subtracts the initial investment. A positive NPV means the project's return exceeds the cost of capital, directly increasing shareholder wealth. In contrast, IRR assumes reinvestment at the IRR rate, which can overstate returns when the IRR is high, and payback period ignores cash flows beyond the cutoff, making NPV the gold standard for capital budgeting decisions.
Key takeaway
Answer the scenario, not the keyword: identify the specific constraint before choosing the most familiar-sounding option.
Real-world example
A practitioner preparing for the PK0-005 exam encounters this exact type of scenario on the job. The correct answer here is not the most general option — it is the best answer for the specific constraint described. Answer the scenario, not the keyword: identify the specific constraint before choosing the most familiar-sounding option. Real exam questions reward reading the full scenario before eliminating options, because the constraint defines which answer fits.
What to study next
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Project Management Concepts — study guide chapter
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FAQ
Project Management Concepts — This question tests Project Management Concepts — Read the scenario before looking for a memorised answer..
The correct answer is: Proposal A — Proposal A has an NPV of $150,000, which is a direct measure of the project's value creation in today's dollars. Since NPV accounts for the time value of money and the organization's cost of capital (10%), a positive NPV indicates the project is expected to generate value above the required return. Among the options, NPV is the most financially sound criterion because it quantifies absolute wealth increase, unlike payback period (which ignores time value and cash flows after payback) or IRR (which can be misleading for mutually exclusive projects).
Identify which exam domain this question belongs to, review the core concept, then practise similar questions from the same domain.
Read the scenario before looking for a memorised answer.
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Last reviewed: Jun 24, 2026
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