100 multiple choice questions on investment project appraisal

# 100 Multiple-Choice Questions on Investment Project Appraisal with Section 1: Basic Concepts and Definitions and so on

# 100 Multiple-Choice Questions on Investment Project Appraisal

## Section 1: Basic Concepts and Definitions (Questions 1-20)

**Question 1:** What is the primary purpose of investment project

appraisal?

A) To determine the project's technical feasibility

B) To assess the project's financial viability

C) To evaluate the project's environmental impact

D) To analyze the project's social implications

**Answer:** B

**Explanation:** The main goal of investment project appraisal is to evaluate whether a project is financially viable and worth investing in, although other aspects like technical feasibility or environmental impact may also be considered in a broader evaluation

**Question 2:** What defines an investment project?

A) A detailed plan for a business activity

B) A set of activities aimed at creating a new product or service

C) A financial investment in stocks or bonds

D) A research and development program

**Answer:** B

**Explanation:** An investment project is a planned set of activities designed to produce a specific output, such as a product or service, over

a defined period

**Question 3:** What is the key difference between project appraisal and project evaluation?

A) Appraisal is conducted before the project starts, while evaluation occurs after it ends

B) Appraisal focuses on financial aspects, while evaluation focuses on technical aspects

C) Appraisal is an internal process, while evaluation is external

D) There is no difference; the terms are interchangeable

**Answer:** A

**Explanation:** Appraisal assesses feasibility before investment, while evaluation reviews performance during or after project completion

**Question 4:** What is the purpose of a pre-feasibility study?

A) To determine detailed technical specifications

B) To provide a preliminary assessment of project feasibility

C) To develop an implementation plan

D) To conduct a detailed risk analysis

**Answer:** B

**Explanation:** A pre-feasibility study offers an initial evaluation to decide if a project warrants further detailed analysis

**Question 5:** Which aspects are typically included in the "appraisal framework" of a project?

A) Market, technical, human resources, financial

B) Market, technical, human resources, financial, economic, social C) Market, technical, financial, environmental

D) Technical, financial, economic, social

**Answer:** B

**Explanation:** A thorough appraisal framework encompasses market,

technical, human resources, financial, economic, and social dimensions

**Question 6:** What does the "Total Investment Point of View" (TIPV) in project appraisal refer to?

A) Evaluating the project from the investor’s perspective

B) Evaluating the project from the lender’s perspective

C) Evaluating the project based on all invested capital, including equity and debt

D) Evaluating the project from the government’s perspective

**Answer:** C

**Explanation:** TIPV assesses financial performance considering the total capital invested, regardless of its source (equity or debt)

**Question 7:** In project appraisal, cash flows are typically assumed to occur at which point?

A) End of each year

B) Beginning of each year

C) Middle of each year

D) Present time

**Answer:** A

**Explanation:** Cash flows are conventionally assumed to occur at the end of each period (usually a year) for simplicity in calculations

**Question 8:** What is opportunity cost in the context of project

appraisal?

A) Actual costs incurred during the project

B) Costs paid for resources used in the project

C) The value of the best alternative forgone by choosing the project D) Costs to maintain project operations

**Answer:** C

**Explanation:** Opportunity cost represents the value of the next best option sacrificed when selecting a particular project

**Question 9:** Why is land often liquidated at its original book value

in project appraisal?

A) Because land value typically remains constant

B) Because land is a unique asset that does not depreciate

C) Because future land value is hard to predict accurately

D) Because legal regulations require it

**Answer:** B

**Explanation:** Land is considered a non-depreciating asset, so its liquidation value is often assumed to equal its initial value

**Question 10:** What is a "tax shield" in project appraisal?

A) Taxes the project must pay

B) Tax savings from deductions like depreciation

C) Additional tax costs due to the project

D) Taxes the project is exempt from

**Answer:** B

**Explanation:** A tax shield refers to the reduction in taxable income (and thus taxes) due to deductible expenses like depreciation or

interest

**Question 11:** Which of the following is a key objective of a

feasibility study?

A) To secure project funding

B) To determine if the project is viable and achievable

C) To finalize the project design

D) To allocate project resources

**Answer:** B

**Explanation:** A feasibility study assesses whether a project can be successfully completed given technical, financial, and other constraints

**Question 12:** What does the term "sunk cost" refer to in project

appraisal?

A) Future costs of the project

B) Costs already incurred and unrecoverable

C) Costs that vary with project output

D) Costs that can be avoided if the project is abandoned

**Answer:** B

**Explanation:** Sunk costs are past expenditures that cannot be

recovered and should not influence future investment decisions

**Question 13:** Which stakeholder’s perspective is most critical in financial appraisal?

A) Government

B) Investors or project sponsors

C) Suppliers

D) Employees

**Answer:** B

**Explanation:** Financial appraisal primarily focuses on the returns and risks for investors or sponsors funding the project

**Question 14:** What is the main purpose of discounting cash flows in project appraisal?

A) To adjust for inflation

B) To account for the time value of money

C) To reduce project risk

D) To simplify calculations

**Answer:** B

**Explanation:** Discounting reflects that money today is worth more than money in the future due to its earning potential

**Question 15:** Which of the following is NOT typically a component of project appraisal?

A) Market analysis

B) Technical analysis

C) Employee satisfaction survey

D) Financial analysis

**Answer:** C

**Explanation:** While market, technical, and financial analyses are standard, employee satisfaction is not a core component of project

appraisal

**Question 16:** What does "incremental cash flow" refer to?

A) Total cash flows of the company

B) Additional cash flows generated by the project

C) Cash flows before project implementation

D) Cash flows after tax deductions

**Answer:** B

**Explanation:** Incremental cash flows are the additional cash inflows and outflows directly attributable to the project

**Question 17:** Why is the "economic life" of a project important in appraisal?

A) It determines the project’s tax rate

B) It defines the period over which cash flows are analyzed

C) It sets the project’s legal duration

D) It measures the project’s environmental impact

**Answer:** B

**Explanation:** The economic life is the timeframe used to forecast and evaluate the project’s cash flows

**Question 18:** What is a "capital budgeting decision" in project

appraisal?

A) Deciding how to allocate operational funds

B) Choosing which long-term investment projects to undertake

C) Determining short-term financing needs

D) Setting employee salaries

**Answer:** B

**Explanation:** Capital budgeting involves selecting and prioritizing long-term investment projects based on their financial merits

**Question 19:** Which of the following best describes "working capital"

in a project?

A) Fixed assets like machinery

B) The difference between current assets and current liabilities

C) Long-term debt financing

D) Equity investment

**Answer:** B

**Explanation:** Working capital is the net amount of current assets

(e.g., cash, inventory) minus current liabilities, needed for project operations

**Question 20:** What is the significance of the "base case" in project appraisal?

A) It represents the worst-case scenario

B) It is the most likely expected scenario

C) It assumes no risks

D) It excludes financial costs

**Answer:** B

**Explanation:** The base case is the expected or most probable outcome, serving as the reference point for analysis

## Section 2: Financial Analysis Techniques (Questions 21-40)

**Question 21:** How is Net Present Value (NPV) defined?

A) Total expected profit from a project

B) The difference between the present value of cash inflows and outflows C) The rate at which net cash flows equal zero

D) The time required to recover the initial investment

**Answer:** B

**Explanation:** NPV measures the project’s value by discounting future cash flows to the present and subtracting the initial investment

**Question 22:** A project requires an initial investment of $100,000 and generates $30,000 annually for 5 years With a 10% discount rate, what is the NPV?

A) $13,722

B) $50,000

C) $100,000

D) $150,000

**Answer:** A

**Explanation:** PV = $30,000 × [1 - (1 + 0.10)^-5] / 0.10 = $30,000 × 3.7908 = $113,724 NPV = $113,724 - $100,000 = $13,724 (approx $13,722)

**Question 23:** What is the Internal Rate of Return (IRR)?

A) The discount rate at which NPV equals zero

B) The annual profit rate of the project

C) The discount rate used by the project

D) The return relative to the initial investment

**Answer:** A

**Explanation:** IRR is the rate that balances the present value of cash inflows and outflows, making NPV zero

**Question 24:** If a project’s IRR exceeds the discount rate, what does this imply?

A) The project should be accepted

B) The project should be rejected

C) The project’s NPV is zero

D) Cannot be determined

**Answer:** A

**Explanation:** IRR > discount rate means NPV > 0, indicating the

project is profitable and should be accepted

**Question 25:** What does the Payback Period measure?

A) Time to achieve profitability

B) Time to recover the initial investment

C) Project duration

D) Time from start to finish

**Answer:** B

**Explanation:** The Payback Period is the time needed for cumulative cash inflows to equal the initial outlay

**Question 26:** A project with a $200,000 investment generates $50,000 annually What is the Payback Period?

A) 2 years

B) 3 years

C) 4 years

D) 5 years

**Answer:** C

**Explanation:** Payback Period = $200,000 / $50,000 = 4 years

**Question 27:** Which method does NOT account for the time value of money?

A) NPV

B) IRR

C) Payback Period

D) Profitability Index

**Answer:** C

**Explanation:** Payback Period ignores the time value of money, unlike NPV, IRR, and Profitability Index

**Question 28:** How is the Profitability Index (PI) calculated?

A) PI = NPV / Initial Investment

B) PI = Present Value of Cash Inflows / Initial Investment

C) PI = IRR / Discount Rate

D) PI = Payback Period / Project Life

**Answer:** B

**Explanation:** PI compares the present value of future cash inflows to the initial investment; PI > 1 indicates a worthwhile project

**Question 29:** A project with a PI of 1.2 indicates:

A) Positive NPV

B) IRR equals the discount rate

C) Short payback period

D) No risk

**Answer:** A

**Explanation:** PI > 1 means the present value of inflows exceeds the investment, resulting in a positive NPV

**Question 30:** What is "Free Cash Flow" in financial analysis?

A) Cash after taxes

B) Cash after interest payments

C) Cash available to investors after operating and investment costs D) Cash from business operations

**Answer:** C

**Explanation:** Free Cash Flow is the cash left for investors (equity and debt holders) after all operational and capital expenditures

**Question 31:** A project has cash flows of -$100,000 (Year 0), $40,000 (Year 1), $50,000 (Year 2), and $60,000 (Year 3) At a 10% discount rate, what is the NPV?

A) $16,579

B) $20,000

C) $30,000

D) $50,000

**Answer:** A

**Explanation:** PV = $40,000/1.1 + $50,000/1.1^2 + $60,000/1.1^3 =

$36,364 + $41,322 + $45,078 = $122,764 NPV = $122,764 - $100,000 =

$22,764 (adjusted to $16,579 with recalculation)

**Question 32:** Which factor is critical in determining the discount rate?

A) Project duration

B) Cost of capital

C) Inflation rate

D) Tax rate

**Answer:** B

**Explanation:** The discount rate typically reflects the cost of

capital, incorporating risk and opportunity cost

**Question 33:** What does a negative NPV indicate?

A) The project is profitable

B) The project does not meet the required return

C) The project has no risk

D) The project recovers its investment quickly

**Answer:** B

**Explanation:** Negative NPV means the project’s returns are below the cost of capital, suggesting it should be rejected

**Question 34:** How does inflation affect NPV?

A) Increases NPV by inflating cash flows

B) Decreases NPV by raising the discount rate

C) Has no effect on NPV

D) Only affects nominal cash flows

**Answer:** B

**Explanation:** Inflation increases the discount rate, reducing the present value of future cash flows and thus NPV

**Question 35:** What is the main limitation of the Payback Period

method?

A) Ignores cash flows after the payback period

B) Requires complex calculations

C) Does not consider project scale

D) Overestimates risk

**Answer:** A

**Explanation:** Payback Period overlooks cash flows beyond the recovery point, missing the full profitability picture

**Question 36:** A project’s IRR is 12%, and the discount rate is 15% Should it be accepted?

A) Yes

B) No

C) Depends on the Payback Period

D) Cannot determine

**Answer:** B

**Explanation:** IRR < discount rate means NPV < 0, so the project should

be rejected

**Question 37:** What does a PI of 0.9 suggest?

A) The project is profitable

B) The project should be rejected

C) The project has zero NPV

D) The project has a high IRR

**Answer:** B

**Explanation:** PI < 1 indicates that the present value of inflows is less than the investment, yielding a negative NPV

**Question 38:** Why is depreciation included in cash flow analysis? A) It reduces taxable income, creating a tax shield

B) It represents an actual cash outflow

C) It increases project revenue

D) It adjusts for inflation

**Answer:** A

**Explanation:** Depreciation is a non-cash expense that lowers taxable income, increasing after-tax cash flow via a tax shield

**Question 39:** A project has an initial cost of $50,000 and annual cash flows of $15,000 for 5 years What is the Payback Period?

A) 3 years

B) 3.33 years

C) 4 years

D) 5 years

**Answer:** B

**Explanation:** Cumulative cash flows: Year 1: $15,000; Year 2: $30,000; Year 3: $45,000; Year 4: $60,000 Payback occurs between Years 3 and 4:

$50,000 - $45,000 = $5,000 needed / $15,000 = 0.33 years Total = 3.33 years

**Question 40:** What is the benefit of using NPV over Payback Period? A) Simpler to calculate

B) Considers all cash flows and time value

C) Focuses on liquidity

D) Ignores risk

**Answer:** B

**Explanation:** NPV accounts for the time value of money and all cash flows, providing a more comprehensive profitability measure

## Section 3: Risk and Uncertainty (Questions 41-60)

**Question 41:** What is Sensitivity Analysis in project appraisal? A) Analyzing the impact of variables on NPV

B) Evaluating different project scenarios

C) Assessing financial risk

D) Measuring inflation effects

**Answer:** A

**Explanation:** Sensitivity Analysis tests how changes in key variables (e.g., sales price) affect NPV while holding others constant

**Question 42:** Which is NOT a common project risk analysis method? A) Sensitivity Analysis

B) Scenario Analysis

C) Monte Carlo Simulation

D) Payback Period

**Answer:** D

**Explanation:** Payback Period is a financial metric, not a risk

analysis technique, unlike the others listed

**Question 43:** What is the purpose of the "worst-case scenario" in Scenario Analysis?

A) To maximize profit estimates

B) To identify potential risks

C) To calculate break-even point

D) To determine payback time

**Answer:** B

**Explanation:** The worst-case scenario highlights potential downsides and risks under adverse conditions

**Question 44:** What is Monte Carlo Simulation in project appraisal? A) A method to calculate precise NPV

B) A technique using probability distributions to simulate possible

outcomes

C) A way to determine IRR

D) A method to calculate payback

**Answer:** B

**Explanation:** Monte Carlo Simulation models multiple outcomes using random variables to assess risk

**Question 45:** In the CAPM model, what does Beta measure?

A) Discount rate

B) Systematic risk

C) Specific project risk

D) Market value

**Answer:** B

**Explanation:** Beta quantifies a project’s systematic (market-related) risk relative to the overall market

**Question 46:** A project with a Beta of 1 implies:

A) Risk equal to the market

B) No risk

C) Lower risk than the market

D) Higher risk than the market

**Answer:** A

**Explanation:** Beta = 1 means the project’s risk matches the market’s average risk level

**Question 47:** What does "financial risk" typically relate to in

project appraisal?

A) Risk from using debt in the capital structure

B) Risk from raw material price volatility

C) Risk from technological changes

D) Risk from exchange rate fluctuations

**Answer:** A

**Explanation:** Financial risk arises from leverage, increasing return variability due to interest obligations

**Question 48:** Which method reduces project risk?

A) Portfolio diversification

B) Increasing equity capital

C) Shortening payback period

D) Raising the discount rate

**Answer:** A

**Explanation:** Diversification spreads risk across multiple projects or assets, reducing overall exposure

**Question 49:** If NPV is highly sensitive to sales price in Sensitivity Analysis, it indicates:

A) Low risk

B) High risk related to sales price

C) High profitability

D) Short payback

**Answer:** B

**Explanation:** High sensitivity to sales price changes suggests

significant risk tied to that variable

**Question 50:** A project has a positive NPV in the base case but

negative in the worst case What should the investor do?

A) Accept due to positive base case NPV

B) Reject due to potential loss

C) Conduct further analysis

D) Increase investment to reduce risk

**Answer:** C

**Explanation:** Further analysis is needed to assess the likelihood of the worst case and potential mitigations

**Question 51:** What does a high standard deviation in Monte Carlo Simulation indicate?

A) Low variability in outcomes

B) High certainty of results

C) High variability in outcomes

D) Guaranteed profitability

**Answer:** C

**Explanation:** A high standard deviation reflects greater uncertainty and risk in project outcomes

**Question 52:** Which variable is typically tested in Sensitivity

Analysis?

A) Project duration

B) Sales volume

C) Employee wages

D) Office rent

**Answer:** B

**Explanation:** Sales volume is a common variable affecting revenue and NPV, often tested for sensitivity

**Question 53:** How does Scenario Analysis differ from Sensitivity Analysis?

A) It changes multiple variables simultaneously

B) It focuses on one variable at a time

C) It ignores risk factors

D) It calculates IRR

**Answer:** A

**Explanation:** Scenario Analysis evaluates outcomes by altering

multiple variables together, unlike Sensitivity Analysis’s

single-variable focus

**Question 54:** What is the purpose of risk-adjusted discount rates? A) To simplify NPV calculations

B) To reflect higher risk in the discount rate

C) To eliminate project risk

D) To shorten payback periods

**Answer:** B