Project Financial Analysis Flashcards

A project has total revenue of $1,200,000, total costs of $900,000, and a tax rate of 30%. What is the net income after tax?

Answer: $210,000

Pre-tax income = $1,200,000 − $900,000 = $300,000; Net income = $300,000 × (1 − 0.30) = $210,000.

Which analysis technique assigns probability distributions to uncertain variables and runs thousands of simulations to assess project risk?

Answer: Monte Carlo Simulation

Monte Carlo simulation uses random sampling from probability distributions to model the range of possible project outcomes.

What does a negative Net Present Value (NPV) indicate about a project?

Answer: The project destroys value at the given discount rate

A negative NPV means the project's discounted costs exceed its discounted benefits, indicating it destroys shareholder value.

In lifecycle cost analysis, which cost category typically represents the largest portion of total ownership cost for complex infrastructure projects?

Answer: Operation and maintenance cost

For complex infrastructure, operation and maintenance costs over the project's life frequently exceed the initial capital investment.

What is the purpose of a project's cash flow statement in financial analysis?

Answer: To track actual inflows and outflows of cash over time

A cash flow statement tracks when cash actually enters and leaves the project, which is essential for liquidity planning and NPV calculations.

A project requires $1,000,000 capital, financed 60% by debt at 8% and 40% by equity at 15%. What is the WACC?

Answer: 10.8%

WACC = (0.60 × 8%) + (0.40 × 15%) = 4.8% + 6.0% = 10.8%.

Which term describes the rate at which a project's NPV changes in response to a change in the discount rate?

Answer: NPV Sensitivity

NPV sensitivity to the discount rate measures how much the project value changes per unit change in the required rate of return.