TOPIC: Free PMP® Exam Sample Question

A company is considering two projects, Alpha and Beta. Project Alpha is expected to result in a $50 million net profit, while project Beta and is expected to net $45 million. Both projects could be very lucrative and rewarding. However, the financial controller has stated that the company can only invest in one of these projects.

If project Alpha is selected, what will be the opportunity cost?

A. $95 million
B. $50 million
C. $45 million
D. $5 million

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HINT: Opportunity cost is defined as the value of the alternative that is not chosen.

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Answer and Explanation
The correct answer is C

Opportunity cost is regarded as the value of the alternative that is not chosen. If the decision is made to select project Alpha and forego the $45 million in potential profit from project Beta, the opportunity cost of this decision is $45 million, the value of project Beta.

The topic of this question is not covered in the PMBOK^® Guide). However, the Project Management Professional (PMP)^® Examination Content Outline (ECO) indicates that while there are some commonalities between the PMBOK^® Guide) and the ECO, the exam is not bound by the PMBOK^® Guide). The list of enablers specified in the tasks of the ECO domains is not exhaustive either. The ECO assumes that prospective PMP aspirants are familiar with other sources of information/preparation, including but not limited to PMI Code of Ethics and Professional Conduct, PMI’s Practice Standards (e.g., Scheduling, Earned Value Management, etc.); organizational behavior theories such as Tuckman’s Ladder, Theory X and Theory Y, Maslow's hierarchy of needs; commonly frowned upon project management practices, such as gold plating; and others. We intentionally have these questions in our simulator so that you would be better prepared for the real exam. PMP aspirants are encouraged to explore additional sources of information and/or to be familiar with them from their project management experience.

Details for each option:

A. $95 million
Incorrect. Opportunity cost is the value of the project not selected. $95 million is the sum of both projects and would only be correct if the company did not select an either alternative. The question is asked from the perspective of project Alpha being selected and, therefore, the opportunity cost would be the value of project Beta which is $45 million.

B. $50 million
Incorrect. $50 million represents the potential profit from project Alpha. Since opportunity cost refers to the value of the project not selected and project Alpha was selected, the company will forgo $45 million, the value of project Beta, as an opportunity cost.

C. $45 million
Correct. Opportunity cost refers to the opportunity given up by selecting one project over another. If the decision is made to go with project Alpha and forego the $45 million in potential profit from project Beta, this means the opportunity cost of this decision is $45 million, the value of project Beta.

D. $5 million
Incorrect. project Alpha has an anticipated net profit of $5 million more than project Beta. The opportunity cost is represented by the potential net profit of the project not selected rather than the difference between the two projects.

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