PMI Scheduling Professional Certification (PMI-SP) Practice Exam

What is cost-benefit analysis?

1. A financial analysis tool used to determine the benefits provided by a project against its cost.

2. An estimation of future cash flows without considering costs.

3. A qualitative assessment of project impacts.

4. A process of reallocating budgets to maximize profit.

The correct answer is: A financial analysis tool used to determine the benefits provided by a project against its cost.

Cost-benefit analysis is a crucial financial analysis tool used to assess the economic viability of a project by comparing the expected benefits to the associated costs. This method helps stakeholders determine whether investing in a project will yield a favorable return on investment. In performing a cost-benefit analysis, various factors are quantified in monetary terms, enabling a clear view of potential financial gains against the expenditures involved. This method is particularly useful for project managers and decision-makers as it allows for better resource allocation, prioritization of projects, and justification for funding requests based on tangible outcomes. By effectively illustrating how the benefits outweigh the costs, stakeholders can make informed decisions about pursuing or shelving a project. Other options do not capture the full essence of a cost-benefit analysis. For instance, estimating future cash flows without considering costs focuses solely on potential returns and omits the important aspect of evaluating the expenditure required to achieve those returns. A qualitative assessment of project impacts relates more to subjective evaluations and does not involve a systematic financial comparison of costs and benefits. Similarly, reallocating budgets to maximize profit focuses on financial management rather than the initial evaluation of project viability through a comparative analysis of costs and benefits.