Project Management - Chapter 3 MCQ

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?

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

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?

$13 000 in year 1 $12 000 in year 2 $11 000 in year 3 and $10 000 in year 4

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?

$15 000 in year 1 $15 000 in year 2 $15 000 in year 3 and $15 000 in year 4

A 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?

$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

A firm is BEST served if its project portfolio:

Has a number of low-cost experimental prototypes.

Project portfolio management is typically NOT used to balance:

Human and technical resources.

Which of these statements about valuation models is NOT correct?

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

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

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

Multiple project environments thrive on:

Improvisation by project teams.

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?

Intermediate-term cost receives a weighting of 12%.

What is an internal rate of return and what advantages and disadvantages are accrued by using it to evaluate projects?

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.

The pairwise comparison approach:

Is a method to split the weights assigned to subcriteria.

A proactive project portfolio:

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

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

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

The systematic process of selecting supporting and managing a firm's collection of projects is called:

Project portfolio management.

Provide an example of a numeric and non-numeric project selection model and indicate what advantage each might hold over the other

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

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

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.

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

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.

Realignment describes:

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

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

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.

Quality risk refers to the chance that:

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

A commercial factor in project selection and screening might be:

The long-term market dominance.

Which statement regarding project selection and screening criteria is BEST?

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

One facet of risk in project screening is:

The potential for lawsuits or legal obligation.

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

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.

What are the advantages and limitations of simple scoring models?

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.

How does a checklist project screening model work?

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.

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

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.

Options models are used to assist in project selection decisions:

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

A checklist screening model does NOT consider:

Whether one criterion is more important than another.

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

Will the project work as intended?

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

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

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

TRUE

The most important thing to remember when using project selection models is to be consistent and objective.

TRUE

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

TRUE

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

TRUE

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:

Desire for portfolio balance.

Successful firms use project portfolio planning routinely to:

Develop products with long lead times and plan ahead.

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:

Ease of use.

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

Emphasis on quality

Which statement regarding project selection is BEST?

Every decision model has both objective and subjective factors.

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

Examples will vary and may include product launches public programs building projects or any number of other projects

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

FALSE

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

FALSE

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.

FALSE

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

FALSE

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

FALSE

Numeric project selection models by their very nature employ objective values

FALSE

Successful project management firms rely on home runs and narrowly concentrated efforts since specialization creates name recognition and market share

FALSE

The Analytical Hierarchy Process elegantly addresses scaling issues in criteria and negative utility in alternative scores.

FALSE

The checklist model of project screening has a mechanism to accommodate the differential importance of relevant criteria

FALSE

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

FALSE

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

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

Souder's model selection criterion that encourages ease of adaptation to changes in tax laws building codes among others is called:

Flexibility.

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?

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

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?

Project A is twice as good as project C.

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

A maximum return for a minimum risk.

Between projects A and B project A will be considered a superior financial undertaking if it has:

A shorter payback period than project B.

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: , Numeric and subjective.

Which statement about the Analytical Hierarchy Process is FALSE?

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

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

Be objective in their selection method.

An internal operating issue in project screening and selection is:

Change in physical environment.

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

Comparability.

Evaluating projects in terms of their strategic fit with existing project lines or their ability to augment the current product family is known as:

Complementarity.

The first step in the Analytical Hierarchy Process:

Consists of constructing a hierarchy of criteria and subcriteria.

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:

Cost.

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

Need to develop employees.

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

Opportunity.

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

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.

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:

Out-of-sync projects and portfolios.

Souder's project screening criterion that indicates an effective model must reflect organization objectives including a firm's strategic goals and mission is called:

Realism.

Rank the problems in implementing portfolio management from largest to smallest and justify your rankings.

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.

The concept of project portfolio management holds that firms should:

Regard all projects as unified assets.

Describe any four types of risk that projects may hold

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.

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

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

A principal cause of portfolio underperformance is:

Scarce resources.

A simple scoring model for project evaluation requires:

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

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

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.

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:

Subjective and inaccurate.

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

TRUE

An effective project selection model must reflect organizational objectives including a firm's strategic goals and mission

TRUE

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

TRUE

An options model could be used when financial criteria would change significantly over time.

TRUE

Every decision model contains both objective and subjective factors

TRUE

Personnel costs comprise one of the highest sources of project expense

TRUE

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:, Flexibility.