Project Management Professional (PMP) Practice Exam

Your organization is considering to run a project which will entail an investment of $1,000,000. The product from the project is forecasted to create revenues of $250,000 in the first year after the end of the project and of $420,000 in each of the two following years. What is true for the net present value of the project over the three years cycle at a discount rate of 10%?

1. The net present value is positive, which makes the project attractive.

2. The net present value is positive, which makes the project unattractive.

3. The net present value is negative, which makes the project attractive.

4. The net present value is negative, which makes the project unattractive.

The correct answer is: The net present value is negative, which makes the project unattractive.

The net present value (NPV) of a project is a calculation of the value of future cash flows in today's money. It is calculated by subtracting the initial investment from the present value of the future cash flows. In this scenario, the initial investment is $1,000,000 and the future cash flows are $250,000 in the first year and $420,000 in the following two years. A discount rate of 10% is used to bring the future cash flows back to their present value. Based on this calculation, the net present value of the project is negative, which means that the project is not expected to generate enough value to cover the initial investment and provide a return. Therefore, the correct answer is D. Option A is incorrect because a positive NPV would make the project attractive, not unattractive. Option B is incorrect because a positive NPV would