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?
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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What is Return on Investment (ROI)?
How do you calculate Net Profit for a project?
Why is it important to consider factors beyond ROI when selecting a project?
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PMI Project Management Professional (PMP) /
Process
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