hardMultiple Choice
PK0-005 Practice Question: A project manager is evaluating whether to…
A project manager is evaluating whether to proceed with a project that has a net present value (NPV) of -$10,000, an internal rate of return (IRR) of 4%, and a payback period of 3 years. The company's required rate of return is 6%. What should the project manager recommend?
⚠ Common exam trap
CompTIA often tests the misconception that a short payback period alone justifies project acceptance, ignoring that NPV and IRR are the primary financial decision criteria and that payback period does not account for the time value of money or profitability after the payback period.
Answer choices
Why each option matters
Answer the question above first, then reveal the full breakdown to understand why each option is right or wrong.
Correct answer & explanation
✓
Reject the project because it does not meet financial criteria.
The project has a negative NPV (-$10,000) and an IRR (4%) that is lower than the company's required rate of return (6%). Both of these financial criteria indicate the project will destroy value rather than create it. Therefore, the project manager should recommend rejecting the project based on standard capital budgeting principles.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✗
Defer the decision until a qualitative analysis is completed.
Why it's wrong here
Deferring for qualitative analysis ignores that the quantitative figures already decide the matter: a negative NPV and an IRR of 4% below the 6% required rate of return both indicate rejection. Qualitative factors supplement, but cannot overturn, a project failing every financial threshold.
- ✗
Accept the project because the payback period is less than 5 years.
Why it's wrong here
Payback measures how quickly outlay is recovered, ignoring the time value of money and cash flows beyond that point. A three-year payback can accompany a negative NPV and an IRR below the 6% required return. Payback alone suits quick liquidity screening, not the accept/reject decision here.
- ✗
Request additional funding to improve the NPV.
Why it's wrong here
Additional funding cannot alter the project's underlying cash flows, so the negative NPV and 4% IRR against a 6% required return persist. Funding suits projects with sound economics needing capital. Here the shortfall is viability, not budget, so the recommendation should be to reject.
- ✓
Reject the project because it does not meet financial criteria.
Why this is correct
With a negative NPV and an IRR of 4% below the company's 6% required rate of return, the project destroys value on both discounted measures. The payback period is irrelevant when the hurdle rate is unmet, so rejecting it satisfies the stated financial criteria.
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