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5 Economic Changes and Project Value Online Quiz Questions

Use this free practice quiz with 20 questions to review 5 Economic Changes and Project Value, test your knowledge, and prepare for your next test or exam.

20 questions
01
True or false
1 point

True or false: General inflation by itself necessarily changes a project's value in real terms.

  1. A

    True

  2. B

    False

02
Choose one
1 point

An analyst forecasts project cash flows that include expected inflation. Which discounting approach keeps the analysis consistent?

  1. A

    Forecast cash flows including expected inflation and discount them using a real rate.

  2. B

    Forecast cash flows including expected inflation and discount them using a nominal rate.

  3. C

    Remove general inflation from cash flows and discount them using a nominal rate.

  4. D

    Remove general inflation from cash flows and discount them using a loan rate, regardless of its basis.

03
True or false
1 point

True or false: Holding other assumptions constant, a higher discount rate generally reduces the present value of benefits and costs that occur in the future.

  1. A

    True

  2. B

    False

04
Fill in the blank
1 point

Complete the consistent pairings: For nominal analysis, forecast cash flows that include expected inflation and discount them using a . For real analysis, remove general inflation from cash flows and discount them using a .

05
Written response
1 point

Construction wages rise faster than the general price level. What are these differences between individual prices and the general price level called?

06
Choose one
1 point

A project earns export revenue and must buy imported equipment. What may happen to these amounts in domestic-currency terms if the domestic currency weakens?

  1. A

    Imported equipment becomes cheaper and export revenues are worth less in domestic currency.

  2. B

    Foreign-currency debt service becomes cheaper, while domestic-currency export revenue rises automatically.

  3. C

    Imported equipment and foreign-currency debt service may become more expensive, while export revenues may be worth more in domestic currency.

  4. D

    All project costs and revenues change by the same amount, regardless of their currency.

07
Written response
1 point

A project will receive $110 one year from now. At an annual discount rate of 10%10\%, what is the present value of that receipt in dollars? Use PV=1101+0.10\text{PV}=\frac{110}{1+0.10}.

08
Choose all
1 point

A project relies on a key material whose price may rise. Which factors should analysts consider when assessing the project's exposure? Select all that apply.

  1. A

    How much of the input the project uses.

  2. B

    When the input is needed.

  3. C

    Whether the input's price rises by exactly the general inflation rate.

  4. D

    Whether substitutes are available, especially if a scarce or imported input is a large share of costs.

09
Choose all
1 point

A project team is assessing how broader economic conditions could affect its plans. Which are plausible channels through which those conditions can affect a project? Select all that apply.

  1. A

    A slowdown may reduce customer demand, sales, or usage.

  2. B

    Labor-market changes may affect wage costs and skilled-worker availability.

  3. C

    A broad economic forecast should always be applied as a single adjustment to NPV, without identifying its effects.

  4. D

    Credit conditions and supply disruptions may affect implementation, operations, or funding.

10
Choose one
1 point

A project analyst wants to identify how strongly NPV responds to each of several uncertain assumptions. Which method best matches that objective?

  1. A

    Change all economic assumptions together and report only the most optimistic result.

  2. B

    Vary one assumption at a time and show the resulting effect on NPV.

  3. C

    Replace the economic discount rate with the project's loan rate.

  4. D

    Assume the same inflation rate applies to every project price.

11
Open ended
1 point

A project has a loan offer with a stated interest rate. Explain why an analyst should not automatically use that rate as the economic discount rate, and identify one principle that should guide the economic appraisal.

12
Choose one
1 point

In a society-wide economic appraisal, which approach may be appropriate when the market exchange rate does not reflect the economic opportunity cost of foreign currency?

  1. A

    Always use the market exchange rate because it necessarily equals the economic opportunity cost of foreign currency.

  2. B

    Where relevant, use the prescribed shadow-exchange-rate method because market rates may not reflect the economic opportunity cost of foreign currency.

  3. C

    Use the project's loan interest rate to convert foreign-currency amounts.

  4. D

    Exclude foreign-currency costs and revenues from the appraisal.

13
Choose one
1 point

An analyst forecasts project costs and benefits in money amounts that include expected inflation. Which discounting approach is consistent with these cash flows?

  1. A

    Use nominal cash flows with a real discount rate.

  2. B

    Use nominal cash flows with a nominal discount rate.

  3. C

    Use real cash flows with a nominal discount rate.

  4. D

    Adjust nominal cash flows for inflation again after discounting.

14
True or false
1 point

True or false: An economic appraisal should automatically use the project's loan rate as its discount rate.

  1. A

    True

  2. B

    False

15
Choose one
1 point

A project imports equipment, owes debt in a foreign currency, and earns some revenue from exports. If the domestic currency weakens, which combined effect is plausible?

  1. A

    Imported equipment becomes cheaper, and export revenues lose domestic-currency value.

  2. B

    Foreign-currency debt service becomes cheaper, and export revenues lose domestic-currency value.

  3. C

    Imported equipment and foreign-currency debt service may become more expensive, while export revenues may gain domestic-currency value.

  4. D

    All costs and revenues remain unchanged in domestic-currency terms.

16
Choose one
1 point

A fuel-intensive project expects fuel prices to rise faster than general inflation, while its fuel use stays the same. What is the most direct implication?

  1. A

    The project's real operating costs increase if fuel use is unchanged.

  2. B

    The project's real operating costs must stay constant because all prices rise.

  3. C

    The project's real operating costs decrease because fuel has become more expensive.

  4. D

    The change affects only financing costs, not operating costs.

17
Choose one
1 point

A toll-road project is being appraised during an economic slowdown. Which channel should analysts most directly test when estimating the slowdown's effect on project benefits?

  1. A

    Assume the slowdown changes NPV by the same percentage for every project.

  2. B

    Test whether the slowdown reduces traffic and usage-related revenue.

  3. C

    Focus only on changes to the project's imported equipment costs.

  4. D

    Treat the slowdown as affecting financing but not demand.

18
Written response
1 point

In a society-wide economic appraisal, what method may be prescribed when market exchange rates do not reflect the economic opportunity cost of foreign currency?

19
Written response
1 point

An analyst finds that a project’s NPV falls to zero when the price of steel reaches a particular level. What appraisal term describes that threshold level?

20
Fill in the blank
1 point

If a project’s major costs and revenues are exposed to several economic variables that may shift together, analysts can assess NPV under a coherent economic .