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
IRR (12%) > required rate (10%) and positive NPV indicate financial viability.
- ✗
The project's payback period is acceptable.
Why it's wrong here
Payback period is not provided; NPV and IRR indicate viability.
- ✗
The project is expected to break even.
Why it's wrong here
A positive NPV indicates profit, not break-even.
- ✗
The project is not financially viable.
Why it's wrong here
The IRR exceeds the required rate of return, indicating viability.
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