CAPM Practice Question: Project Management Fundamentals and Core Concepts
A project manager is reviewing the project charter and notices that the business case includes a cost-benefit analysis with a Net Present Value (NPV) of $50,000 and an Internal Rate of Return (IRR) of 12%. The company's required rate of return is 10%. What should the project manager conclude about this project?
⚠ Common exam trap
PMI often tests the misconception that a positive NPV alone is sufficient without considering the IRR relative to the required rate, or that a higher IRR always means a better project, ignoring scale and cash flow timing.
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
✓
The project is financially viable.
The project is financially viable because the NPV is positive ($50,000), indicating that the present value of expected cash inflows exceeds the present value of cash outflows. Additionally, the IRR of 12% exceeds the company's required rate of return (10%), meaning the project's expected return is greater than the cost of capital. Both metrics independently confirm financial feasibility.
Answer analysis
Option-by-option breakdown
For each option: why learners choose it and why it is or isn't the right answer here.
- ✓
The project is financially viable.
Why this is correct
The IRR of 12% exceeds the company's required rate of return of 10%, and the NPV is positive at $50,000. Both indicators confirm the project generates value above the hurdle rate, satisfying the financial viability criterion in the stem.
- ✗
The project's payback period is acceptable.
Why it's wrong here
Payback period measures how quickly cumulative cash flows recover the initial investment; it is not derivable from NPV or IRR figures alone. The stem supplies only NPV and IRR, so no payback conclusion is possible. Payback would be the correct metric if the question asked when the investment is recovered.
- ✗
The project is expected to break even.
Why it's wrong here
Break-even means NPV equals zero, where discounted benefits exactly offset costs. Here NPV is $50,000 positive, so returns exceed the required threshold. Break-even analysis would be the right conclusion only if the calculated NPV were zero, not positive.
- ✗
The project is not financially viable.
Why it's wrong here
An IRR of 12% exceeds the 10% required rate of return and the NPV of $50,000 is positive, so the project is financially viable. The option confuses a positive NPV with a negative one; a negative NPV would signal non-viability and would be the correct conclusion in that scenario.
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