Free PMI Project Management Professional (PMP) Practice Question
A project manager is evaluating two potential projects. Project A has an initial investment of $100,000 and is expected to generate $150,000 in revenue. Project B requires an initial investment of $80,000 and is projected to generate $110,000 in revenue. Based on the financial performance metric that compares the net profit to the cost of investment, which project should the project manager recommend?
Both projects have equal financial performance
Project B
Project A
Neither project, as the financial metric is negative for both
The correct answer is Project A. To calculate the Return on Investment (ROI), we use the formula: ROI = (Net Profit / Cost of Investment) x 100%
For Project A: ROI = ($150,000 - $100,000) / $100,000 x 100% = 50%
For Project B: ROI = ($110,000 - $80,000) / $80,000 x 100% = 37.5%
Project A has a higher ROI of 50% compared to Project B's 37.5%, making it the better choice from an ROI perspective. This demonstrates that while Project B requires a lower initial investment, Project A provides a higher return relative to its cost.
It's important to note that while ROI is a valuable metric for project selection, it should not be the sole factor in decision-making. Other considerations such as risk, resource availability, and alignment with strategic objectives should also be taken into account.
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