Quiz 2: Cost-Benefit Analysis

1. What is the primary purpose of conducting a cost-benefit analysis? a) To determine the

total cost of a project b) To compare the monetary benefits and costs of a project c) To
estimate the time required to complete a project d) To evaluate the environmental impact
of a project
2. How is net present value (NPV) calculated? a) Subtracting the initial investment cost
from the total revenue b) Subtracting the total cost from the total benefit c) Discounting
the future cash flows and subtracting the initial investment d) Discounting the future cash
flows and adding the initial investment
3. Define opportunity cost. a) The explicit monetary cost of an activity b) The value of the
next best alternative forgone c) The total cost of producing one additional unit of output
d) The revenue earned from selling additional units of output
4. What does a positive net present value (NPV) indicate? a) The project is economically
feasible b) The project is economically unfeasible c) The project is expected to generate
losses d) The project is expected to break even
5. In a cost-benefit analysis, how are non-monetary factors typically evaluated? a) They are
converted into monetary units using market prices b) They are ignored because they
cannot be quantified c) They are evaluated qualitatively using subjective judgments d)
They are considered separately from monetary factors
6. How does the discount rate affect the present value of future cash flows? a) A higher
discount rate increases present value b) A higher discount rate decreases present value c)
A lower discount rate increases present value d) A lower discount rate decreases present
value
7. What is the formula for calculating the benefit-cost ratio? a) Total benefits / Total costs
b) Total costs / Total benefits c) Net benefits / Net costs d) Net costs / Net benefits
8. What is the purpose of sensitivity analysis in cost-benefit analysis? a) To identify the
most profitable alternative b) To assess the impact of uncertainty on project outcomes c)
To estimate the opportunity cost of the project d) To calculate the breakeven point of the
project
9. Describe a situation where sunk costs should be ignored in decision-making. a) When
sunk costs are recoverable b) When sunk costs are relevant to future decisions c) When
sunk costs are non-recoverable and irrelevant to future decisions d) When sunk costs
represent a significant portion of the total project cost
10. How does the length of the project affect the discount rate used in a cost-benefit analysis?
a) Longer projects require a higher discount rate b) Longer projects require a lower
discount rate c) The length of the project has no effect on the discount rate d) Longer
projects require a variable discount rate that changes over time