Which metric is used to estimate project revenue from direct costs?

• A. Net multiplier
• B. A measure of cash flow efficiency
• C. A measure of asset turnover
• D. Profit-to-earnings ratio

Answer: (A)

The key idea is using a pricing factor that turns direct costs into the total revenue the project must generate. The net multiplier represents how much revenue is needed per dollar of direct costs to cover overhead and achieve profit. By multiplying the direct costs by this factor, you estimate the project revenue necessary to cover indirect costs and earn a desired profit. For example, if direct costs are 500,000 and the net multiplier is 1.5, the estimated revenue is 750,000. The other metrics don’t serve this purpose: cash flow efficiency measures how well cash flows through the project, asset turnover compares revenue to assets, and the profit-to-earnings ratio relates to company stock valuation, not converting direct costs to project revenue.