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Test Bank Project Management: Achieving Competitive Advantage 4th

Edition Pinto

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Project Management: Achieving Competitive Advantage, 4e Test Bank (Pinto)

Chapter 3 Project Selection and Portfolio Management

1) Souder's project screening criterion that indicates an effective model must reflect organization

objectives, including a firm's strategic goals and mission is called:

A) Realism.

B) Capability.

C) Comparability.

D) Ease of use.

Answer: A

Diff: 2

Section: 3.1 Project Selection

LO: 3.1: Explain six criteria for a useful project selection/screen model.

Classification: Concept

AACSB: Application of Knowledge

2) Souder's project screening criterion of realism addresses the question:

A) How many workers will the project need?

B) Will the project work as intended?

C) Who are the stakeholders?

D) How often should the project team meet?

Answer: B

Diff: 2





3) A selection model that is broad enough to be applied to multiple projects has the benefit of:

A) Ease of use.

B) Comparability.

C) Capability.

D) Flexibility.

Answer: B

Diff: 2



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Classification: Factual


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4) A project screening criterion that allows the company to compare long-term versus short-term

projects, projects with different technologies, and projects with different commercial objectives

is:

A) Flexibility.

B) Ease of use.

C) Capability.

D) Realistic.

Answer: C

Diff: 2



Classification: Application


5) If a model can be applied successfully by people in all areas and levels of an organization, it is

said to possess the trait of:

A) Capability.

B) Ease of use.

C) Flexibility.

D) Realism.

Answer: B

Diff: 2





6) An MBA redesign committee plans to spend a decade traveling the world to benchmark

graduate programs at other universities. Regardless of the screening model being used, it will

suffer from poor performance in the area of:

A) flexibility.

B) Capability.

C) Comparability.

D) Cost.

Answer: D

Diff: 1





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7) Souder's model selection criterion that encourages ease of adaptation to changes in tax laws,

building codes, among others, is called:

A) Ease of use.

B) Cost.

C) Capability.

D) Flexibility.

Answer: D

Diff: 2





8) A writer estimates it will take three months to generate spiffy documents to accompany a

seminal work in operations management. He grossly underestimates the time required and misses

his deadline by two months. This estimate was:

A) Objective and accurate.

B) Subjective and accurate.

C) Objective and inaccurate.

D) Subjective and inaccurate.

Answer: D

Diff: 2





9) A wedding planner allows $10,000 for flowers and three weeks to receive all RSVPs back

from the list of 700 guests. Both estimates are correct within a fraction of a percent. We could

describe this factoid as:

A) Numeric and subjective.

B) Numeric and objective.

C) Non-numeric and subjective.

D) Non-numeric and objective.

Answer: A

Diff: 2





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10) An internal operating issue in project screening and selection is:

A) Expected return on investment.

B) Change in physical environment.

C) Patent protection.

D) The chance that the firm's goodwill will suffer due to the quality of the finished project.

Answer: B

Diff: 2





11) Quality risk refers to the chance that:

A) The project relies on developing new or untested technologies.

B) The firm's reputation may suffer when the product becomes available.

C) The well-being of the users or developers may decline dramatically.

D) The firm may face a lawsuit.

Answer: B

Diff: 1





12) One facet of risk in project screening is:

A) The change in manufacturing operations resulting from the project.

B) The initial cash outlay.

C) The potential for lawsuits or legal obligation.

D) The strategic fit of the project with the company.

Answer: C

Diff: 2





13) One project factor that directly impacts a firm's internal operations is the:

A) Expected return on investment.

B) Financial risk.

C) Need to develop employees.

D) Impact on company's image.

Answer: C

Diff: 2





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14) A commercial factor in project selection and screening might be:

A) A need to develop employees.

B) The likelihood that users of the project are injured.

C) The long-term market dominance.

D) The impact on the company's image.

Answer: C

Diff: 2





15) Which statement regarding project selection is BEST?

A) Organizational reality can be perfectly captured by most decision-making models.

B) Before selecting any project, the team should identify all the relevant issues that play a role in

project selection.

C) Decision models must contain either objective or subjective factors.

D) Every decision model has both objective and subjective factors.

Answer: D

Diff: 3





16) Which statement regarding project selection and screening criteria is BEST?

A) The most complete model in the world is still only a partial reflection of organization reality.

B) It is possible, given enough time and effort, to identify all relevant issues that play a role in

project selection.

C) Decision models are either objective or subjective.

D) For many projects, more than 80% of the decision criteria are vital.

Answer: A

Diff: 1





17) An effective project selection model must reflect organizational objectives, including a firm's

strategic goals and mission.

Answer: TRUE

Diff: 2





18) An expert's opinion on an issue may be subjective but very accurate.

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Answer: TRUE

Diff: 1





19) Numeric project selection models, by their very nature, employ objective values.

Answer: FALSE

Diff: 2





20) Every decision model contains both objective and subjective factors.

Answer: TRUE

Diff: 3





21) Describe or define any four important attributes for screening models used to evaluate

projects.

Answer: Souder identifies five important issues that managers should consider when evaluating

screening models: realism, capability, flexibility, ease of use, and cost, and the text offers up

comparability. Taking these in reverse order, comparability refers to the ability of the criterion to

be applied to multiple projects without bias. Cost can be defined as the expense in either time or

money (or both) that is required to use the model. Ease of use calls for the model to be simple

enough to be used by people in all areas of the organization, both in specific project roles and in

those related to functional positions. Flexibility is the quality of ease of modification if trial

applications require changes. Capability is the ability of the model to respond to changes in the

conditions under which projects are carried out. Finally, realism is the ability of the model to

reflect organizational objectives, including a firm's strategic goals and mission.

Diff: 2





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22) Provide an example of a numeric and non-numeric project selection model and indicate what

advantage each might hold over the other.

Answer: Project selection models come in two general classes: numeric and non-numeric.

Numeric models seek to use numbers for the decision process involved in selecting projects.

These values can either be derived objectively or subjectively. Non-numeric models do not

employ numbers at decision inputs, relying instead on other data. Each technique has its own

merits and may be employed successfully, and a choice between the two should be tempered by

the adage GIGO. If a numeric model uses objective, external values that are "correct," then a

decision maker can have a high degree of confidence that the values under study will lead to a

reasonable decision. A non-numeric model might appeal to decision makers that have less of a

quantitative bent or those that operate in a less quantifiable decision arena.

Diff: 2




AACSB: Analytical Thinking

23) Describe any four types of risk that projects may hold.

Answer: Risk factors reflect elements of unpredictability for the firm. Technical risks occur due

to the development of new or untested technologies. Financial risks arise from the financial

exposure caused by investing in the project. Safety risk may arise as the well-being of users or

developers of the project is compromised. Any risks to the firm's goodwill or reputation due to

the quality of the completed project are termed quality risks. Finally, the potential for lawsuits or

legal obligation is legal exposure.

Diff: 2





24) A checklist screening model does NOT consider:

A) Whether one criterion is more important than another.

B) Governmental or stakeholder interference.

C) Product durability and future market potential of the product line.

D) The riskiness of the new venture.

Answer: A

Diff: 3

Section: 3.2 Approaches to Project Screening and Selection

LO: 3.2: Understand how to employ checklists and simple scoring models to select projects.



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25) A simple scoring model for project evaluation requires:

A) Importance weights from 1 to 10 assigned to each criterion.

B) Score values assigned to each criterion in terms of its rating.

C) A division of weights by scores to arrive at a standardized score for each criterion.

D) A summation for each criterion to achieve an overall criterion score.

Answer: B

Diff: 2





26) The simple scoring model has this advantage over a checklist model for screening projects.

A) Scaling from 1 to 5 is extremely accurate.

B) Scaling models ensure a reasonable link between the selected and weighted criteria and the

business objectives that motivated their selection.

C) Scaling models allow decision makers to treat one criterion as more important than another.

D) Scaling models have been proven to make correct decisions better than 95% of the time while

checklists only achieve 80% accuracy.

Answer: C

Diff: 2





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27) A project manager is using a simple scoring model to decide which of four projects is best,

given the company's limited resources. The criteria, importance weights, and scores for each are

shown in the table. Which project should be chosen?

Project Criteria

Importance

Weight Score

1 1 3

Greenlight 2 2 2

3 3 1

1 1 2

Runway 2 2 1

3 3 3

1 1 1

X 2 2 2

3 3 2

1 1 2

Ilevomit 2 2 2

3 3 2

A) Project Greenlight

B) Project Runway

C) Project X

D) Project Ilevomit

Answer: B

Diff: 2





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28) A project manager is using a simple scoring model to decide which of four projects is best,

given the company's limited resources. The criteria, importance weights, and scores for each are

shown in the table. Which project should be chosen?

Project Criteria

Importance

Weight Score

1 1 2

White 2 2 2

3 3 3

1 1 3

Pinkman 2 2 3

3 3 2

1 1 3

Fring 2 2 2

3 3 3

1 1 3

Salamanca 2 2 1

3 3 3

A) Project White

B) Project Pinkman

C) Project Fring

D) Project Salamanca

Answer: C

Diff: 2





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29) A simple scoring model is used to decide among three projects that we'll call A, B, and C.

The total score for project A is 30, for project B is 20, and for project C is 10. Which of the

following statements is BEST?

A) If project A is successfully completed, it will yield three times the benefits that project C

would have provided.

B) If project C is chosen, the company would benefit only half as much as if they had chosen

project B.

C) Project C is better than project B for this company at this point in time.

D) Project A is better than project B for this company at this point in time.

Answer: D

Diff: 2





30) The pairwise comparison approach:

A) Is a method to split the weights assigned to subcriteria.

B) Is a method to compare pairs of hierarchies prior to any further analysis.

C) Is a means of achieving all project objectives within the allocated time frame.

D) May be used instead of AHP if time is limited.

Answer: A

Diff: 1





31) The simplest method of project screening and selection is developing a list of criteria that

pertain to the choice of projects and then applying them to alternatives.

Answer: TRUE

Diff: 1





32) The checklist model of project screening has a mechanism to accommodate the differential

importance of relevant criteria.

Answer: FALSE

Diff: 1





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33) A simplified scoring model addresses all the weakness of a checklist model for project

screening.

Answer: TRUE

Diff: 1





34) A simplified scoring model is used to determine that project Cow has a score of 38 and

project GiGi has a score of 30. Project Cow is therefore 26.7% better than project GiGi.

Answer: FALSE

Diff: 2





35) How does a checklist project screening model work?

Answer: The simplest method of project screening and selection is developing a checklist of

criteria that pertain to a choice of projects and then applying them to the projects. Each potential

project is scored against the list of criteria and is rated as performing high, medium, or low with

the project scoring highest overall being selected as the project to undertake.

Diff: 2





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36) Your university is considering two projects to increase enrollment: offering traditional

classes from midnight to 6 a.m. or offering house call classes where the professor would visit

your home to provide instruction. Use a simple scoring model with at least three criteria to

evaluate these two potential projects and indicate which project should be chosen.

Answer: Answers may vary widely. A simplified scoring model ranks criteria according to their

relative importance. Each project is evaluated for performance on each criterion and an overall

score for each project is computed by summing the products of each score times its weight. A

simple scoring model might be as follows with House Calls narrowly edging out Midnight

Classes.

Project Criteria & Weight Score

Weighted

Score

Total

Score

Midnight Classes Time 2 2 4

Cost 1 1 1

Market Potential 3 2 6 11

House Calls Time 2 3 6

Cost 1 3 3

Market Potential 3 1 3 12

Diff: 2





37) What are the advantages and limitations of simple scoring models?

Answer: The simple scoring model has some useful advantages as a project selection device.

First, it is easy to tie to critical strategic goals for the company and second, it is easy to

comprehend and use. The major limitation of simple scoring models is that the scaling is not

very accurate and is often treated as if ratios and difference in scoring levels have real meaning.

Another drawback of these models is that they depend on the relevance of the selected criteria

and the accuracy of weight given them.

Diff: 1





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38) The first step in the Analytical Hierarchy Process:

A) Requires supporting requirements to be combined into Level II challenges.

B) Is analyzing the process you intend to improve before undertaking any improvement project.

C) Requires Saatyfication of the team members.

D) Consists of constructing a hierarchy of criteria and subcriteria.

Answer: D

Diff: 1


LO: 3.3: Use more sophisticated scoring models, such as the Analytical Hierarchy Process.



39) Which statement about the Analytical Hierarchy Process is FALSE?

A) AHP scores are significant.

B) AHP can be used to capture choice options that do not yield positive outcomes.

C) AHP can improve the process of developing project proposals.

D) AHP groups subcriteria that share the weight of a common higher-level criterion.

Answer: B

Diff: 2





40) The Analytic Hierarchy Process is being employed in a project selection decision. One major

criteria, cost, receives a weighting value of 40%, which is split into short term (50%),

intermediate term (30%), and long term (20%). Which of these statements is BEST?

A) Short term, intermediate term, and long term must receive overall weightings that total 100%.

B) There must be at least one other major criteria that has 40% weighting.

C) Intermediate-term cost receives a weighting of 12%.

D) Long-term cost receives an overall weighting of 80%.

Answer: C

Diff: 2





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41) The Analytical Hierarchy Process is used to decide among three projects that we'll call A, B,

and C. The total score for project A is .650, for project B is .514, and for project C is .321.

Which of the following statements is BEST?

A) Project A is twice as good as project C.

B) The analysis must be incorrect because the total scores should sum to 1.00.

C) The analysis must be incorrect because there are two total scores that exceed 0.50.

D) The analysis must be incorrect because project C's total score is odd.

Answer: A

Diff: 1





42) The profile model plots a graph on a(n):

A) Perception-reality pair of axes.

B) Risk-return pair of axes.

C) Efficiency-effectiveness pair of axes.

D) Saxon-Norman pair of axes.

Answer: B

Diff: 1





43) The Analytical Hierarchy Process elegantly addresses scaling issues in criteria and negative

utility in alternative scores.

Answer: FALSE

Diff: 1





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44) How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth

the extra effort?

Answer: The Analytical Hierarchy Process (AHP) is a four-step process that consists of

structuring the hierarchy of criteria, allocating weights to criteria, assigning numerical values to

evaluation dimensions, and evaluating project proposals. Primary differences between the two

approaches are that AHP takes a more rigorous view of the assignment of criteria weights and

values to the evaluation dimensions. Differences among evaluation scale items are not

necessarily equal and can be adjusted as managers and decision makers see fit. The resulting

product sums have meaning, unlike the values computed in a simple scoring model. AHP

methodology can dramatically improve the project selection process over use of the simple

scoring model. AHP is not without limitations and does require more effort to configure and use.

The authors caution against using a project screening tool that has a poor cost/benefit ratio, so

determination of the value derived from use of AHP versus a simple scoring model can best be

made on a case-by-case basis.

Diff: 3





45) The efficient frontier in project management is the set of portfolio options that offer:

A) A minimum return for a minimum risk.

B) A minimum return for a maximum risk.

C) A maximum return for a minimum risk.

D) A maximum return for a maximum risk.

Answer: C

Diff: 1


LO: 3.4: Learn how to use financial concepts, such as the efficient frontier and risk/return

models.



46) Which statement about the use of the profile model is BEST?

A) The profile model requires careful calculation of the percentage risk for each possible project.

B) The scale used for the profile model can be any two numerical variables that a company

deems important.

C) The efficient frontier in the profile model is where return is 100% (or greater) and risk is 0%.

D) For a given level of risk, a positive move on the return axes would indicate a superior project.

Answer: D

Diff: 2



models.



47) Between projects A and B, project A will be considered a superior financial undertaking if it

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has:

A) A shorter payback period than project B.

B) A lower average rate of return than project B.

C) A lower net present value than project B.

D) A longer payback period than project B.

Answer: A

Diff: 1

Section: 3.3 Financial Models


models.



48) The efficient frontier in a profile model is the set of options that offers a maximum return for

a given level of risk or a minimum risk for every level of return.

Answer: TRUE

Diff: 2



models.



49) The present value of money is lower the further out in the future I expect to spend it.

Answer: FALSE

Diff: 2



models.



50) The reciprocal of the payback period is used to calculate the average rate of return for a

project.

Answer: TRUE

Diff: 2



models.



19

51) Internal rate of return is preferable to net present value because IRR employs a weighted

average cost of capital discount rate that reflects potential reinvestment.

Answer: FALSE

Diff: 3



models.



52) Describe the use of a profile model and sketch an example, clearly labeling every component

and the best alternative in your example.

Answer: Profile models allow managers to plot risk/return options for various alternatives and

then select the project that maximizes return while staying within a certain range of minimum

acceptable risk. The profile model makes use of a concept known as the efficient frontier—the

set of project portfolio options that offers either a maximum return for every given level of risk

or the minimum risk for every level of return. A profile model appears below.

Diff: 3



models.



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53) Net present value is being used to break the tie among four otherwise equal projects. If the

interest rate is 4%, which of these anticipated four-year flows would yield the greatest net

present value?

A) $10,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $13,000 in year 4

B) $13,000 in year 1; $12,000 in year 2; $11,000 in year 3; and $10,000 in year 4

C) $10,000 in year 1; $10,000 in year 2; $13,000 in year 3; and $13,000 in year 4

D) $11,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $12,000 in year 4

Answer: B

Diff: 3


LO: 3.5: Employ financial analyses and options analyses to evaluate the potential for new

project investments.



54) A company facing an interest rate of 8% must choose among projects offering the following

four-year cash flows. If the company is employing the net present value criterion, which project

should they choose?

A) $25,000 in year 1; $15,000 in year 2; $10,000 in year 3; and $5,000 in year 4

B) $5,000 in year 1; $5,000 in year 2; $20,000 in year 3; and $30,000 in year 4

C) $15,000 in year 1; $15,000 in year 2; $15,000 in year 3; and $15,000 in year 4

D) $5,000 in year 1; $5,000 in year 2; $25,000 in year 3; and $25,000 in year 4

Answer: C

Diff: 3






55) Which of these statements about internal rate of return analysis is BEST?

A) If the IRR is less than the company's required rate of return, the project is worth funding.

B) Projects having lower IRR are generally superior to those having higher IRR.

C) IRR and NPV calculations always make the same investment recommendations.

D) If net outflows follow a period of net inflows, IRR may give conflicting results.

Answer: D

Diff: 3






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56) Which of these statements about valuation models is NOT correct?

A) NPV employs a weighted average cost of capital discount rate that reflects potential

reinvestment.

B) IRR and NPV calculations typically make the same investment recommendations only when

the projects are independent of each other.

C) If cash flows are not normal, IRR may arrive at multiple solutions.

D) IRR is a more robust determinant of project viability than NPV.

Answer: D

Diff: 3






57) A project manager is using the internal rate of return method to make the final decision on

which project to undertake. Which of these four projects has the highest internal rate of return?

A) $25,000 initial outlay with $10,000 cash inflows during the following five years

B) $12,500 initial outlay with $10,000 cash inflows during the following five years

C) $25,000 initial outlay with $5,000 cash inflows during the following five years

D) $12,500 initial outlay with $5,000 cash inflows during the following five years

Answer: B

Diff: 3






58) A project manager is using the internal rate of return method to make the final decision on

which project to undertake. Which of these four projects has the highest internal rate of return?

A) $100,000 initial outlay with $10,000 cash inflows during the first two years, $20,000 during

the third and fourth years, and $30,000 during the fifth year

B) $100,000 initial outlay with a $5,000 cash inflow during the first year, $15,000 cash inflow

during the second year, and $25,000 cash inflows during years three through five

C) $75,000 initial outlay with a $5,000 cash inflow during the first year, increasing by $5,000 per

year through the fifth year

D) $50,000 initial outlay with $5,000 cash inflows during the first two years, $15,000 during the

third and fourth years, and $20,000 during the fifth year

Answer: D

Diff: 3






59) A project manager is using the net present value method to make the final decision on which

22

project to undertake. The company has a 12% required rate of return and expects a 3% rate of

inflation for the following four years. What is the NPV of a project that has cash flows as shown

in the table?

Year Cash Flow

0 -$250,000

1 $50,000

2 $60,000

3 $70,000

4 $80,000

A) -$9,762

B) -$56,859

C) -$69,387

D) -$98,780

Answer: C

Diff: 3






60) A project manager is using the payback method to make the final decision on which project

to undertake. The company has a 10% required rate of return and expects a 4% rate of inflation

for the following four years. What is the non-discounted payback of a project that has cash flows

as shown in the table?

Year Cash Flow

0 -$250,000

1 $50,000

2 $60,000

3 $70,000

4 $80,000

A) 3.875 years

B) 3.625 years

C) 3.750 years

D) 3.500 years

Answer: A

Diff: 3






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for the following five years. What is the discounted payback of a project that has cash flows as

shown in the table?

Year Cash Flow

0 -$100,000

1 $20,000

2 $50,000

3 $50,000

4 $25,000

5 $500,000

A) 3.4 years

B) 2.6 years

C) 5.0 years

D) 4.2 years

Answer: C

Diff: 3






62) A project manager is using the net present value method to make the final decision on which

project to undertake. The company has a 15% required rate of return and expects a 5% rate of

inflation for the following four years. What is the NPV of a project that has cash flows as shown

in the table?

Year Cash Flow

0 -$350,000

1 $50,000

2 $80,000

3 $100,000

4 $150,000

A) $4.955

B) $42,586

C) -$23,667

D) -$122,569

Answer: D

Diff: 3







24


for the following five years. What is the non-discounted payback of a project that has cash flows

as shown in the table?

Year Cash Flow

0 -$500,000

1 $50,000

2 $75,000

3 $150,000

4 $150,000

5 $750,000

A) 3.7 years

B) 4.1 years

C) 5.0 years

D) 4.8 years

Answer: B

Diff: 3








for the following five years. What is the discounted payback of a project that has cash flows as

shown in the table?

Year Cash Flow

0 -$500,000

1 $50,000

2 $75,000

3 $150,000

4 $150,000

5 $750,000

A) 3.9 years

B) 4.3 years

C) 4.6 years

D) 4.1 years

Answer: B

Diff: 3






65) Options models are used to assist in project selection decisions:

25

A) When IRR calculations are favorable but NPV calculations are unfavorable.

B) When a company may not recover the money it invests in a project.

C) When NPV calculations are favorable but IRR calculations are unfavorable.

D) When a company is guaranteed to recover the money it invests in a project.

Answer: B

Diff: 2






66) Regardless of which selection method a firm uses, it should always:

A) Be able to predict how much revenue will be returned to the firm each year.

B) Know which project will ultimately succeed and which ones will fail.

C) Be objective in their selection method.

D) Use a weighted scoring technique.

Answer: C

Diff: 2






67) An options model could be used when financial criteria would change significantly over

time.

Answer: TRUE

Diff: 2






68) The most important thing to remember when using project selection models is to be

consistent and objective.

Answer: TRUE

Diff: 1






26

69) What is the time value of money principle and how does it apply to project selection?

Answer: The time value of money principle suggests that money earned today is worth more

than money expected in the future. Future money is expected to be worth less for two reasons: 1)

the impact of inflation, and 2) the inability to invest the money. The time value of money

principle may be applied to project selection as one criterion to ascertain which project will

generate the greatest return on a company's investment. Projects that have a relatively certain

return of greater sums of money would be preferred over projects that stand a chance of returning

less money in today's dollars.

Diff: 1






70) How can a payback period approach be used to evaluate potential projects?

Answer: The project payback period approach estimates the amount of time that will be

necessary to recoup the investment in a project; that is, how long will it take the project to pay

back its initial budget and begin to generate positive cash flow for the company. The discounted

cash flow method is used to estimate cash outlays and inflows resulting from investment in a

project, and these positive and negative flows are compared using the ratio:

Payback Period =

Shorter paybacks are preferable to longer paybacks.

Diff: 2






71) What is an internal rate of return and what advantages and disadvantages are accrued by

using it to evaluate projects?

Answer: Internal rate of return (IRR) is a method of evaluating the expected outlays and income

associated with a new project investment opportunity. IRR is the discount rate that equates the

present values of a project's revenue and expense streams. If IRR is greater than or equal to the

company's required rate of return, the project is worth funding. The advantage of using IRR

analysis is its ability to compare alternative projects from the perspective of expected return on

investment. IRR suffers from difficulty in conflicting solutions if cash flows are not normal, e.g.,

if net outflows follow a period of net cash inflows. IRR is not the rate of return for a project.

Diff: 2






72) Inatech is contemplating two different projects and decides to perform a financial analysis to

27

determine which is more financially lucrative. Project A and B have the cash flows as shown and

Inatech uses a required rate of return of 10% and an inflation rate of 4%. Compute the payback

in years and the net present value for both projects and offer advice as to the best course of

action.

Year A B

0 -$250,000 -$400,000

1 $75,000 $125,000

2 $155,000 $230,000

3 $200,000 $288,000

4 $175,000 $265,000

5 $160,000 $225,000

Answer:

Year A

Cumulativ

e A Discount NPV A B

Cumulativ

e B NPV B

0

-

$250,000 -$250,000 1.000

-

$250,000

-

$400,000 -$400,000

-

$400,000

1 $75,000 -$175,000 0.877 $65,789 $125,000 -$275,000 $109,649

2 $155,000 -$20,000 0.769 $119,267 $230,000 -$45,000 $176,978

3 $200,000 $180,000 0.675 $134,994 $288,000 $243,000 $194,392

4 $175,000 $355,000 0.592 $103,614 $265,000 $508,000 $156,901

5 $160,000 $515,000 0.519 $83,099 $225,000 $733,000 $116,858

The NPV for project A is $256,764 and the NPV for project B is higher at $354,778. Project A

has a longer discounted payback, 3.3 years, compared to project B's payback of 3.2 years. The

best course of action based solely on financial considerations is to opt for project B if only one

can be implemented.

Diff: 2






28

73) Inatech is contemplating two different projects and decides to perform a financial analysis to

determine which is more financially lucrative. Project A and B have the cash flows as shown and

Inatech uses a required rate of return of 8%. Compute the internal rate of return for both projects

to determine which is worth of funding.

Year A B

0 -$500,000 -$400,000

1 $260,000 $200,000

2 $170,000 $100,000

3 $125,000 $100,000

4 $75,000 $50,000

5 $25,000 $25,000

Answer: Project A has an IRR of 1.85%. The net present value table based on this percentage is

as follows:

Year A Discount NPV

0 -$500,000 1 -$500,000

1 $260,000 0.893 $232,143

2 $170,000 0.797 $135,523

3 $125,000 0.712 $89,973

4 $75,000 0.636 $47,664

5 $25,000 0.567 $14,186

Project B has an IRR of 1.91%. The net present value table based on this percentage is:

Year B Discount NPV

0 -$400,000 1 -$400,000

1 $200,000 0.893 $178,571

2 $100,000 0.797 $119,579

3 $100,000 0.712 $71,178

4 $50,000 0.636 $31,776

5 $25,000 0.567 $14,186

Both projects fall short of the hurdle rate of 8%, so Inatech should avoid both. The NPV for

project A is $18,488 and for project B is $15,290.

Diff: 2






29

74) What are options models and when should they be used to evaluate projects? Provide an

example.

Answer: Options models open financial analysis to consider a greater range of alternatives to

immediate investment. Organizations can factor the benefit of postponing decisions (and

projects) until financial models indicate projects are worth pursuing. Examples may vary, but

suppose firm A can wait until more market research is performed or until a supplier solves

quality and logistics issues. The cash flows may be superior to those that would come from

immediate investment if company A had to suffer through those issues with their supplier.

Because company A can wait a year, the project scores better on the NPV calculations, clearing

the company's predetermined financial hurdle and will just have to wait to begin rather than

being counted as too great a financial risk.

Diff: 2






75) What two simple rules should be followed when choosing a project selection approach?

Answer: First and foremost, objectivity and consistency in selection method is paramount.

Achieving both objectivity and consistency allows a firm to avoid the pitfall of tweaking results

and starting projects that are personal favorites but don't merit pursuit. Second, a wide variety of

selection methods may be appropriate for specific companies and project circumstances. As with

most things, over-reliance on one end of a scale, whether it is financial, quantitative, or any

other, is not the best approach. A broad algorithm that embraces both financial and non-financial

considerations is often best.

Diff: 2






76) The systematic process of selecting, supporting, and managing a firm's collection of projects

is called:

A) Heavyweight project management.

B) Matrix project organization.

C) Profile management.

D) Project portfolio management.

Answer: D

Diff: 2

Section: 3.4 Project Portfolio Management

LO: 3.6: Recognize the challenges that arise in maintaining an optimal project portfolio for an

organization.



77) The concept of project portfolio management holds that firms should:

30

A) Regard all projects as unified assets.

B) Manage projects as independent entities.

C) Focus on short-term strategic goals.

D) Focus on long-term constraints.

Answer: A

Diff: 2



organization.



78) A project with the chance for a big payout may be funded if an important criterion is:

A) Cost.

B) Opportunity.

C) Top management pressure.

D) Risk.

Answer: B

Diff: 2



organization.



79) A project that is exceptionally risky might still be undertaken by a firm if they have several

other projects underway that are considered more of a sure thing. This approach to project

selection is BEST described by the criterion called:

A) Strategic "fit."

B) Risk.

C) Desire for portfolio balance.

D) Top management pressure.

Answer: C

Diff: 2



organization.



31

80) Evaluating projects in terms of their strategic fit with existing project lines or their ability to

augment the current product family is known as:

A) Balance.

B) An open criterion.

C) Weighted criterion.

D) Complementarity.

Answer: D

Diff: 2



organization.



81) Realignment describes:

A) The change in a project portfolio with an addition of a new project.

B) The shifting of project resources from one to another.

C) The change in strategy for a firm.

D) The annual recasting of all project managers.

Answer: A

Diff: 2



organization.



82) A proactive project portfolio:

A) Is as simple as moving from one project opportunity to another project opportunity.

B) Is an integrated family of projects with a common strategic goal.

C) Is a collection of projects under the umbrella of single project manager carrying the title of

portfolio manager.

D) Is developed with respect to short-term operational concerns.

Answer: B

Diff: 2



organization.



32

83) If an organization that currently is managing a vast and well-balanced portfolio of projects

decides on a new strategic direction, it will initially face the problem of:

A) Scarce resources.

B) A conservative technical community.

C) Out-of-sync projects and portfolios.

D) Unpromising projects.

Answer: C

Diff: 1



organization.



84) A principal cause of portfolio underperformance is:

A) Conservative technical communities.

B) Government intervention.

C) Out-of-sync projects.

D) Scarce resources.

Answer: D

Diff: 2



organization.



85) Project portfolio management is typically NOT used to balance:

A) Human and technical resources.

B) Risk and return.

C) Efficiently run projects and nonperformers.

D) Various families of projects.

Answer: A

Diff: 2



organization.



33

86) Because projects managed under a project portfolio management scheme may be

independent of each other, it is not necessary to consider resource use when deciding to pursue

any single project.

Answer: FALSE

Diff: 1



organization.



87) A balanced project portfolio may be interpreted to mean that a single portfolio contains both

high and low risk, low growth and high growth, and risky and safe projects.

Answer: FALSE

Diff: 2



organization.



88) Successful project management firms rely on home runs and narrowly concentrated efforts

since specialization creates name recognition and market share.

Answer: FALSE

Diff: 1



organization.



89) Personnel costs comprise one of the highest sources of project expense.

Answer: TRUE

Diff: 1



organization.



34

90) If strategy and portfolio are not in sync, the firm is poised on the cusp of success.

Answer: FALSE

Diff: 1



organization.



91) What is project portfolio management and what are its objectives and initiatives?

Answer: Project portfolio management is the systematic process of selecting, supporting and

managing a firm's collection of projects. Projects are managed concurrently under a single

umbrella and may be either related or independent of each other. Portfolio management entails

decision making, prioritization, review, realignment, and reprioritization of a firm's project.

Diff: 2



organization.



92) What criteria might be employed to prioritize projects in a project portfolio? Choose any

example project from recent business news and deduce which criteria were most important to the

company in question.

Answer: The criteria that are commonly used to prioritize projects include cost, opportunity, top

management pressure, risk, strategic fit, and desire for portfolio balance. Choice of criteria will

vary with example selected.

Diff: 2



organization.



35

93) Rank the problems in implementing portfolio management from largest to smallest and

justify your rankings.

Answer: Recent research seems to suggest that the following are among the most common

problems in effective portfolio management: conservative technical committees that are

beholden to favorite projects, methods or technologies that no longer fit the market or company's

strategic thrust; out-of-sync projects and portfolios that may contain worthwhile projects but

these projects won't take the company in the direction it is currently targeted; unpromising

projects that won't improve a company's operations or revenues; and scarce resources such as

human labor, cash, and raw materials. Of these, the text suggests that scarce resources may be

the most pernicious problem, although answers will vary in students' rankings.

Diff: 3



organization.



94) Which of these is NOT a factor in successful project portfolio management?

A) Flexible structure and freedom of communication

B) Low-cost environmental setting

C) Emphasis on quality

D) Time-paced transition

Answer: C

Diff: 2


LO: 3.7: Understand the three keys to successful project portfolio management.



95) Multiple project environments thrive on:

A) Multi-layered bureaucracy.

B) Rigid development processes.

C) Narrow communication channels.

D) Improvisation by project teams.

Answer: D

Diff: 2





36

96) A firm is BEST served if its project portfolio:

A) Has a number of low-cost experimental prototypes.

B) Devotes significant resources to hit product "home runs."

C) Aims to take the marketplace by storm regardless of future trends.

D) Represents narrowly concentrated efforts.

Answer: A

Diff: 1





97) Successful firms use project portfolio planning routinely to:

A) Make quantum jumps from one product to another.

B) Develop products with long lead times and plan ahead.

C) Move as quickly as possible into new territory.

D) Move at glacial pace always within the same product line.

Answer: B

Diff: 2





98) What are three keys to success for project portfolio management? Which is most important?

Answer: The author indicates that the keys to successful project portfolio management are:

flexible structure and freedom of communication; low-cost environmental scanning; and time-

paced transition. Answers may vary on the importance ranking. Some may argue that unfettered

experimentation is most important in achieving new project or product breakthroughs. Others

may tout continuous environmental scanning as a vehicle for quickly adapting a firm's project

portfolio and strategy to the changing market conditions. Finally, others may suggest that in both

project portfolio management and comedy, timing is everything. Having a stable of projects that

are time-phased to launch when others are nearing the end of their useful cycle and still others

are bearing maximum fruit will assure a firm of continued success.

Diff: 1





37

99) Choose any example from recent news media and explain why their project failed.

Answer: Examples will vary and may include product launches, public programs, building

projects, or any number of other projects.

Diff: 2





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