Master Cost-Benefit Analysis: Economic Decision-Making Quiz Questions

📚 Quick Study Guide

• ⚖️ Definition: Cost-Benefit Analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives; it is used to determine options that provide the best approach to achieving benefits while preserving savings.
• 💰 Purpose: CBA helps in making informed decisions by weighing the total expected costs against the total expected benefits of one or more actions.
• ✏️ Steps:
  1. 🎯 Identify all costs and benefits.
  2. 🔢 Assign monetary values to costs and benefits.
  3. 📅 Discount future costs and benefits to present value.
  4. 📊 Calculate the net present value (NPV).
  5. ✅ Make a recommendation based on the NPV.
• ➕ Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
  • Formula: $NPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t}$ where:
    • $CF_t$ = Cash flow in period t
    • $r$ = Discount rate
    • $n$ = Total number of periods
• 💡 Decision Rule:
  • If NPV > 0: Project is acceptable.
  • If NPV < 0: Project is not acceptable.

🧪 Practice Quiz

1. Which of the following best describes Cost-Benefit Analysis?
   1. A) A method for calculating accounting profits.
   2. B) A systematic approach to evaluating the strengths and weaknesses of alternatives.
   3. C) A way to minimize costs regardless of benefits.
   4. D) A tool for maximizing benefits without considering costs.
2. What is the primary purpose of conducting a Cost-Benefit Analysis?
   1. A) To confuse decision-makers with complex data.
   2. B) To justify pre-determined decisions.
   3. C) To make informed decisions by weighing costs against benefits.
   4. D) To eliminate all possible risks.
3. Which of the following is a key step in performing a Cost-Benefit Analysis?
   1. A) Ignoring intangible benefits.
   2. B) Assigning monetary values to all costs and benefits.
   3. C) Maximizing costs to ensure quality.
   4. D) Minimizing benefits to avoid overestimation.
4. What does NPV stand for in Cost-Benefit Analysis?
   1. A) Net Profit Value.
   2. B) Net Present Value.
   3. C) Nominal Price Variance.
   4. D) National Production Volume.
5. If a project has a positive NPV, what does this indicate?
   1. A) The project is not acceptable.
   2. B) The project is acceptable.
   3. C) The project's costs equal its benefits.
   4. D) The project's future cash flows are zero.
6. What should be done with future costs and benefits in a Cost-Benefit Analysis?
   1. A) They should be ignored.
   2. B) They should be discounted to present value.
   3. C) They should be inflated to account for future growth.
   4. D) They should be added without adjustment.
7. Which formula is used to calculate Net Present Value (NPV)?
   1. A) $NPV = \sum_{t=0}^{n} CF_t * (1+r)^t$
   2. B) $NPV = \sum_{t=0}^{n} \frac{CF_t}{(1+r)^t}$
   3. C) $NPV = \sum_{t=0}^{n} CF_t - (1+r)^t$
   4. D) $NPV = \sum_{t=0}^{n} \frac{(1+r)^t}{CF_t}$