PK0-005 Project Management Concepts Practice Question
During project selection, an organization evaluates multiple projects using financial methods. Which THREE of the following are commonly used financial project selection methods? (Select THREE).
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
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Net Present Value (NPV)
Net Present Value (NPV) is correct because it is a core discounted cash flow method that compares the present value of a project's expected future cash inflows against its initial investment, using a specified discount rate to determine whether the project adds value. Internal Rate of Return (IRR) is correct because it is a financial method that calculates the discount rate at which a project's NPV equals zero, allowing comparison of a project's expected return against the organization's required rate of return or cost of capital. Payback period is correct because it is a commonly used financial selection method that measures how long it takes for cumulative cash inflows to recover the initial investment, helping assess liquidity and risk. Earned Value Management (EVM) is not a project selection method; it is a performance measurement technique used during project execution to integrate scope, schedule, and cost. Resource leveling is not a financial selection method; it is a scheduling technique used to resolve resource over-allocation by adjusting start and finish dates.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
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Net Present Value (NPV)
Why this is correct
NPV discounts all future cash inflows and outflows to present value, then subtracts the initial investment. A positive NPV signals the project adds financial value, making it a standard discounted cash-flow method for comparing and selecting candidate projects during project selection.
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Earned Value Management (EVM)
Why it's wrong here
Earned Value Management compares planned value, earned value and actual cost to measure schedule and cost performance during execution; it requires a baselined project, so it cannot appraise competing proposals before selection. It would be correct when the question asks how to track cost and schedule variance on an in-flight project.
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Internal Rate of Return (IRR)
Why this is correct
IRR calculates the discount rate at which a project's NPV equals zero, expressing expected return as a percentage. Comparing that rate against the organisation's cost of capital lets selectors rank projects, satisfying the financial selection criterion in the stem.
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Resource leveling
Why it's wrong here
Resource levelling adjusts task start and finish dates to smooth demand for constrained resources; it is a scheduling technique, not a financial appraisal method, so it produces no ROI, NPV or payback figure for ranking candidate projects. It would be the right answer when the question asks how to resolve resource overallocation within an approved schedule.
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Payback period
Why this is correct
Payback period measures how long cumulative cash inflows take to recover the initial investment. It is a straightforward financial selection method, though it ignores the time value of money and cash flows occurring after the break-even point.
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