PMP Key Exam Concepts - Formulas

By: Anand Bobade; PMP, SCEA, MCP, CIW (nmbobade@gmail.com)
PMP:
Key Exam Concepts Series - Formulas
Crystal Clear understanding of key PMP concepts are
essential to pass the PMP exam. These slide will help you to:
• Visually learn key concepts
• Get deep understand with real world examples
• Sample Questions
Three point
estimation
Earned value
management
Forecasting
PV, FV, NPV,
EMV etc

Definitions
Three point estimation:
• Accuracy improved by considering estimation uncertainty and
risk using three estimates to define an approximate range for an
activity’s cost.
Earned value management:
• It combines SCOPE, SCHEDULE, & RESOURCE measurements to
assess project performance and progress.
• It integrates the scope ,cost & schedule baselines, to form the
performance baseline
Forecasting:
• Forecasting is the process of predicting future project
performance based the current performance to date.
Miscellaneous formulas:
• Present value, Net Present value, Future value, EMV

Three point estimation
Three point
estimation
Project schedule is the most important task which
depends on the activity estimation done by team.
Correctness of schedule heavily depends on the
accuracy of the duration of all project activities.
There are three basic techniques most widely used to
estimate activity duration and build the schedule.
Analogous Estimating
Parametric Estimating
Three Point Estimates

Three point estimation
Weighted
average
• = (O + M + P) / 3Triangular Distribution
• = (O + 4M + P) / 6Beta Distribution or PERT
Accuracy improves by considering estimation uncertainty and risk
using three estimates to define an approximate range for an
activity’s cost.
Optimistic (O): Based on analysis of the best-case
scenario.
Most likely (M) : Based on realistic effort assessment
for required work & any predicted expenses (or ML)
Pessimistic (P). Based on analysis of the worst-case
scenario.
Three point
estimation

Earned Value Management
It combines SCOPE, SCHEDULE, & RESOURCE
measurements to assess project performance and
progress.
It integrates the scope ,cost & schedule baselines, to
form the performance baseline
• It is authorized budget planned for work to be accomplished. Also known
as Budgeted Cost of Work Scheduled (BCWS). Total of PV (PMB or BAC).
Planned Value
(PV)
• It is actual amount of money spent to date. Also known as Actual Cost of
Work Performed (ACWP)
Actual cost
(AC)
• It is amount of money earned from completed work in a given time.
Earned Value is also known as Budgeted Cost of Work Performed
(BCWP).
Earned value
(EV)
Earned value
management

Earned Value Management -> Earn Value (EV)
Earned value Calculation based on the Percentage completion
Schedule
Planned Value
(PV)
Percentage
Complete
Actual Cost
(AC)
Earn Value
(EV)
Task1 10,000 50% 6,000 ?
• Only 50% of work completed
• EV = 50% of PV
• EV = 50% of 10,000 = 5,000
Earn
Value
(EV)
Earned value
management
Schedule
Planned Value
(PV)
Percentage
Complete
Actual Cost
(AC)
Earn Value
(EV)
Task1 10,000 100% 9,000 ??
Task2 8,000 75% 6,000 ??
• EV = (100% of 10,000) + (75% of 8,000)
• EV = 10,000 + 6,000 = 16,000
Earn
Value
(EV)

EVM -> Variance & Performance Index
• SV is a measure of schedule performance on a project.
• EVM & SV are best used with CPM scheduling & risk manag.
Schedule
variance (CV)
• It measure of cost performance on a project
• It indicates relationship of performance to costs spent
Cost variance
(CV)
• SPI is a measure of progress achieved compared to progress
planned on a project
Schedule
performance
index (SPI)
• CPI is a measure of the value of work completed compared
to the actual cost or progress made on the project.
Cost
performance
index (CPI)

• SPI = EV/PV
Schedule
performance
index
• CPI = EV/AC
Cost performance
index
Day1 Day2 Day3 Day4 Day5 Day6 Day7
Planned Budget (PV) 1,000 3,000 5,000 7,000 9,000 11,000 12,000
Actual Cost (AC) 1,100 3,300 6,600 9,900
Earned Value (EV) 1,000 2,000 3,000 4,000
PV: 7,000
BAC: 12,000
AC: 9,900
EV: 4,000
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Cost Variance
Schedule Variance
• SV = EV –PV
Schedule
variance
• CV= EV − ACCost variance
Note: All values are
cumulative

Planned
Value (PV)
Earned Value
(EV)
Actual Cost
(AC)
SV =
EV –PV
CV=
EV − AC
SPI =
EV/PV
CPI =
EV/AC
1000 800 1200 -200 -400 0.8 0.67
1500 1200 1800 -300 -600 0.8 0.67
• SV = EV –PVSchedule variance
• SPI = EV/PVSchedule performance index
• CV= EV − ACCost variance
• CPI = EV/ACCost performance index
Indexes
CPI
SPI
> 1
Under budget
Ahead of schedule
< 1
Over Budget
Behind schedule
= 1
On Budget
(planned cost)
On Schedule

Indexes
CPI
SPI
> 1
You are earning
more than the
spending. In other
words, you are
under budget.
More work has
been completed
than the planned
work. In other
words, you are
ahead of schedule.
< 1
You are earning
less than the
spending. In other
words, you’re over
budget
Less work is
completed than
the planned work.
In other words,
you are behind
schedule.
= 1
Earning &
spending are
equal. Or
proceeding exactly
as per planned
budget spending
On Schedule

• Slowdown
with spending
to try to reach
optimal level
• Try to move
to optimal
otherwise re-
baseline.
• Continue as it
is
• Spend more
to catch up
Under Budget
but behind
schedule
Optimal –
Under Budget
& ahead of
Schedule
Over Budget
but ahead of
schedule
Worst case:
Over Budget
& behind
schedule
CPI >1
[Ahead of
Schedule]
CPI < 1
CPI >1
[Behind
Schedule]
CPI < 1
SPI < 1 [Under Budget] SPI >1
SPI < 1 [Over Budget] SPI >1

Forecasting
Forecasting is used to come up with a future performance or
result of the project.
It gives project sponsors/management an early visibility on
of what may go wrong and help take preventive decision.
Forecasting
Estimate at
Completion (EAC)
Estimate to
Complete (ETC)
To Complete
Performance Index
(TCPI)

Forecasting -> Estimate at Completion (EAC):
Estimate at
Completion
As the project progresses, forecast for estimate at completion
(EAC) may develop based on project performance.
If BAC is no longer viable, forecasted EAC should be considered.
EAC involves making projections of conditions & events in the
project’s future based on current performance & other
knowledge.
Forecasts are generated, updated, and reissued based on work
performance data.

Budgeted Rate:
• Absorb the Variance (originally planed budgeted
rate)
Current Progress:
• Take the ongoing project trend (CPI & SPI or only
CPI)
Erroneous scenario:
• Re-estimate the remaining portion
Estimate at
Completion

• EAC = AC + (BAC –EV)
Based on Budgeted
rate
• EAC = AC + (BAC –EV)/CPI = BAC / CPIBased on CPI.
• EAC = AC + [(BAC –EV) / (CPI ×SPI)]Based on SPI & CPI
• EAC = AC + Bottom up estimateErroneous scenario:
EV=2K
AC=3.3K
BAC=12K
ETC=BAC-CV
EAC=AC+ETC
Estimate at
Completion

Forecasting -> Estimate to Complete
ETC tell you, how much money you need to complete
the task at hand.
ETC = BAC - EV
VAC (Variance at completion) shows whether project is
forecasted to finish under or over budget
VAC = BAC – EAC
VAC % = VAC / BAC
Estimate to
Complete

Forecasting -> TCPI
TCPI is the measure of the CP that is required to be
achieved in order to meet a specified management goal
Ratio of cost to finish outstanding work to remaining
budget.
TCPI
calculation
Same Budget Use BAC
Revised Budget
Use Forecasted
EAC
If BAC is no longer viable, forecasted EAC should be approved, use in
the TCPI calculation.
TCPI

Forecasting -> TCPI
PV: 6,000
BAC: 12,000
AC: 9,000
EV: 4,500
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Day1 Day2 Day3 Day4 Day5 Day6
Planned Budget (PV) Actual Cost (AC) Earned Value (EV)
Fund Remaining
= BAC-AC
= 3,000
Work Remaining
= BAC-EV
= 7,500
Case1: Same Budget

Forecasting -> TCPI
PV: 6,000
BAC: 12,000
AC: 9,000
EV: 4,500
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Day1 Day2 Day3 Day4 Day5 Day6
Planned Budget (PV) Actual Cost (AC) Earned Value (EV)
Fund Remaining
= EAC-AC
= 9,000
Work Remaining
= BAC-EV
= 7,500
EAC: 18,000
18,000
Case 2: Revised Budget

Forecasting -> TCPI
TCPI (based on the BAC):
(BAC –EV)
-----------------------------------------------------------------------------------------------------------
(BAC –AC)
TCPI (based on the EAC):
(BAC –EV)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(EAC –AC)
Work Remaining
----------------------
Fund Remaining
To-complete performance
index (TCPI) =
Case1 : TCPI
• (12,000-4,500)/(12,000-9,000)
• 7,500/3,000
• 2.5
Case2: TCPI
• (12,000-4,500)/(18,000-9,000)
• 7,500/9,000
• .83
TCPI

Forecasting -> TCPI
• Project is in a comfortable position.If TCPI < 1
• Project have to perform with better cost performance than
the past cost performance.If TCPI > 1
• Project can continue with the same cost performance.if TCPI = 1
TCPI

Forecasting -> Variance Analysis
An important aspect of project cost control includes determining the cause and
degree of variance relative to the cost baseline and deciding whether corrective or
preventive action is required.
Variance analysis is used in EVM for determining cause, impact, and corrective
actions
Cost (CV = EV –AC) Schedule (SV = EV –PV) VAC = BAC –EAC
Compare cost performance over time, schedule activities or work packages
overrunning and under running the budget, and estimated funds needed to
complete work in progress.

Miscellaneous Formulas
Miscellaneous
Formulas
Net present value (NPV):
• The total present value (PV) of a time series of
cash flows.
• It is a standard method for using the time value
of money to appraise long-term projects
Profit = Revenue – Costs
Profit Margin = Profit / Revenue
Evaluating efficiency of investment. Bigger
ROI is better.
ROI = (Gain – cost) / Gain

Miscellaneous Formulas
Miscellaneous
Formulas
Internal Rate of Return:
• Interest rate received for an investment
consisting of payments and income that
occur at regular periods
Payback Period:
• The time it takes to recover your
investment in the project before you
start accumulating profit.

Miscellaneous Formula’s
Money
Value as of Today (PV) Future value (FV)
Money – value depends on time
• Receiving AED 100 today has different meaning than
receiving it after 1 year.

Miscellaneous Formula’s -> Future Value
• Present Value (PV) =
1,000
• Years : 2 years
• Interest: 5% (0.05)
• Future Value (FV) = ??
The future value ( FV )
• It refers to a method of calculating how much present value (PV)
of an asset or cash will be worth at a specific time in the future
FV = PV (1 + R)^N
• FV: Future value
• PV: Present value
• N: time of years
• R: Interest rate
PV=100, R=5%, N=1
• = 100 (1 + 0.05)^1 )
• = 100 * (1.05^1)
• = 100 * 1.05
• = 105
Above example
• = 1,000 (1 + 0.05)^2 )
• = 1,000 * (1.05^2)
• = 1,000 * 1.1025
• = 1,102.5

Miscellaneous Formula’s -> Present Value
Present Value:
• The value of an expected income(as of date of valuation)
• PV <= FV because money has interest-earning potential
• To calculate PV discount FV by interest rate
•Present Value (PV) = ?? •Years : 2 years
•Interest: 4% (0.05)
•Future Value (FV) = 1,000
PV = FV/ (1 + R)^N
• PV: Present value
• FV: Future value
• N: time of years
• R: Interest rate
Above example, what is PV??
• PV = 1,000 / (1 + 0.04)^2 )
• PV = 1,000 / (1.04^2)
• PV = 1,000 / 1.0816
• PV = 924

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