Answers 1. (a) Value Engineering is a technique that considers a group of costs collectively when deciding among competing alternatives.

Value Engineering is a technique used to help improve project schedules, profits, quality, and resource usage, and it optimizes life-cycle costs. 2. (b) The cost performance index will remain the same for the remaining part of the project. The assumption in calculating the EAC by dividing the BAC by the CPI is that the CPI will stay the same for the remaining part of the project. The BAC may or may not be different by the end of the project but has nothing to do with the CPI and the EAC calculation. The BAC will only change if the budget is changed, and this only happens if new work is added or taken from the project baseline. The schedule performance index has nothing to do with the EAC calculation. 3. (d) The discounted cash flow technique may use future value and present value formulas to determine the value of the investment or return. Its the least precise of all the cash flow calculations. The payback period is the least precise of all the cash flow techniques, not discounted cash flow. 4. (c) The project budget should be increased by $10,000. The project budget should be increased by $10,000 because the only work actually approved at this time is the change notice for the work to be done. If the work done must be undone at a later time and additional work is required to do it, another change notice must be approved and funding added to the project budget. 5. (d) 25,000 units The break even point is the point where the sum of the investment and the unit cost times the number of units is the same. Break even between $75,000 investment and keeping the existing machine: 75,000 + 2x = 5x; x = 25,000 units Break even between $50,000 investment and keeping the existing machine: 50,000 + 3x = 5x; x = 25,000 units Break even between $75,000 investment and the $50,000 machine: 75,000 + 2x = 50,000 + 3x; x = 25,000 units 6. (c) The project is over budget and ahead of schedule Positive Schedule Variance means project is ahead of schedule; Negative Cost Variance means the project is over-budget. Please note: Crashing will increase costs, and hence make the cost variance worse. 7. (c) Three years The actual payback period is between two years and three years. It is the point where the net or cumulative cash flows equal zero. This occurs between year 2 and 3 and is 2 and 29/30 of a year from the first cash flow. Cumulative cash flow in years are: 1, - 500,000; 2, - 290,000; 3, + 10,000. 8. (a) Is a method of including all of the cost associated with the project over its entire life. Life cycle costing is a way of including the cost of the project even after delivery

to the customer. Many projects have warranty repairs, support, and other costs that add to the cost of the project. 9. (c) -500 The schedule variance is the earned value minus the planned value. SV = EV PV; SV = 2,500 - 3,000 = - 500. 10. (d) 200 The EAC formula for this question is AC + ETC. Plugging in the numbers from the question, you get 138 + 62 = 200. 11. (b) 0.777 The cost performance index is calculated by dividing the EV by AC. CPI = .7 /.9 = .777. 12. (c) Cost baseline. The cost baseline is not available when the budget is created, since it is the result of taking the completed budget and allocating it over the time of the project. The project budget can be calculated without being time phased, but the cost baseline must be time phased. 13. (d) The contractors indirect costs will not increase but the customers payment for them will. 14. (a) Project A Project A has highest NPV of $ 300,000 - hence it is selected. Please note that the investment amount is already taken into acoount in the NPV calculation, so amount invested will not impact selection criteria of the project. 15. (b) Sacrifice of immediate use of cash for consumption or other investments, possibility of inflation and risk. 16. (a) CV = 0. 17. (a) 1.200 The schedule performance index is obtained by dividing the earned value by the planned value. SPI = EV / PV; SPI = 6,000 / 5,000 = 1.200. 18. (b) Alternative A, because it has a higher IRR than Alternative B. IRR is the discount rate when the present value of the cash inflows equals the original investment. Projects with the highest IRR value should be selected so Alternative A is the best option. 19. (a) Alternative A, because the discounted cash flows are $84,019, while the discounted cash flows for Alternative B are $83,352. This question requires discounted cash flow analysis to compare the value of Alternative A to Alternative B. Applying the present value formula to Alternative A is calculated this way: $98,000 (1 + .08)2 = $84,019. Alternative B is calculated this way: $105,000 (1 + .08)3 = $83,352. 20. (c) EVM measures PV, EV, and AC. The earned value management (EVM) tool and technique continuously monitors and measures planned value (PV), earned value (EV), and actual costs (AC). 21. (a) Issue a Budget Update Budget updates are a special category of revised cost estimates - they are changes to an approved cost baseline. These numbers are generally revised only in response to scope changes. - PMBOK 2000 Page 92

22. (a) Project 1, because it has a payback period of 20 months, which is shorter than Project 2s payback period. Project 1s payback period is 20 months. Year 1 inflows are $204,000. Year 2 inflows for the first 8 months are $96,000, making the payback period 20 months. Project 2s payback period is 25 months. Year 1 inflows are $176,000. Year 2 inflows are 144,000, and an additional month at $12,000 makes the payback period 25 months. 23. (b) ETC Estimate to complete (ETC) tells you how much more budget is required to finish the project, given that everything continues at the current levels of performance. 24. (a) Revised Cost Estimates Please refer to Fig 7-1 - PMBOK 2000 Page 84 25. (d) Value Engineering and Life Cycle Costing Life cycle costing together with Value Engineering helps to reduce cost and time, improve quality and performance and optimize decision making. 26. (c) Alternative A and C are both acceptable. Both Alternative A and Alternative C yield a positive NPV, so either project may be chosen based on this criteria alone. 27. (c) Internal Rate of Return 28. (a) Spending plan. The project's spending plan is the plan for the flow of money to pay for the project. 29. (c) The project is a small project Parametric modeling is reliable when a) the historical information used to develop the model was accurate b) the parameters used in the model are readily quantifiable c) the model is scalable (i.e. it works well for a large project as for a very small one) - PMBOK 2000 Page 88 30. (d) Alternative B and C are both acceptable. NPV allows you to calculate an accurate value for each project. In order to determine NPV, you must calculate the PV of the cash flows for each alternative and subtract the initial investment from the sum of the present value of the cash flows. Alternative As NPV is 571, Alternative Bs NPV is 6,620, and Alternative Cs NPV is 1,165. Based on these criteria alone, either alternative B or C is an acceptable choice. The calculations for each alternative are as follows: Alternative As year 1 PV = 12,727 and year 2 PV = 15,702, for a total of 28,429. Alternative Bs year 1 PV = 19,091 and year 2 PV = 16,529, for a total of 35,620. Alternative Cs year 1 PV = 13,636 and year 2 PV = 16,529, for a total of 30,165. 31. (c) Straight Line Depreciation 32. (d) Project D with NPV of $ 100,000 Project B and Project C are not preferable because company suffers losses. Project A does not look good because Opportunity cost is not a project selection criteria. Project D is the only suitable option - because this project has a positive NPV, it will be selected. 33. (c) Reduce EV by $4,000 The EV should be reduced by the amount of the $4,000 already credited to the

earned value report for planting the trees. The AC should not be reduced, and since there is no increase in budget the PV will not be changed. When the vendor installs the new trees, the $4,000 will be added to the EV once again. 34. (a) $3122.60 The calculation for the present value is done by consecutively taking the appropriate factor from the table and multiplying it by the money flowing for the year. In this example $1,300 X .893 + $1,300 X .797 + $1,300 X .712, since there is a $1,300 payment each year. 35. (b) $6,530 The formula for present value is PV = FV / (1 + i)n . Plugging in the information from the question, the formula becomes $8,000 / (1 + .07)3 = $6,530. 36. (a) Report financial information in the ledger A chart of accounts describes the coding structure used by the performing organization to report financial information in its general ledger. - PMBOK 2000 Page 87 37. (a) 0 First, you need to know EAC. The EAC formula for this question is AC + ETC. Plugging in the numbers from the question, you get 138 + 62 = 200. VAC = BAC - EAC. Therefore, 200 - 200 = 0. 38. (a) Work Breakdown Structure Please refer to Fig 7-1 - PMBOK 2000 Page 84 39. (c) Use Mathematical Models to predict project costs Mathematical Models are used as part of Parametric Modeling - PMBOK 2000 Page 88 40. (c) Corrective action. Anything that is done to help bring the project closer to its project plan is called corrective action. Updating the budget and revising the cost estimate are possible corrective actions. Contingency planning is not used to adjust project performance; it is used to budget money for known risks that may occur. 41. (c) The project is behind schedule but on budget. 42. (c) More accurate. A bottom up estimate is a detailed estimate taking into consideration a number of small estimates and summarizing them to a total for the project or subproject being estimated. A top down estimate is usually a less accurate method that estimates the cost of the entire project by means of parametric, analogous, or some other estimating method. 43. (b) Analogous An analogous estimate is one that is arrived at by taking a project or part of a project that is already completed and adjusting the cost on the basis of size. 44. (a) $10,000 The contingency reserve is money that is set aside for dealing with known risks. These known risks can be specifically identified. The risks mentioned in the question are identified and therefore money should be put into the contingency reserve for them. It would not make sense to budget for the impact of every risk, since all risks have a probability associated with them that means that there is

some chance that the impact will not occur; therefore, the expected value should be used. 45. (b) Cost Estimates Cost Estimates are the quantitative assessments of the likely costs of the resources required to complete project activities. 46. (c) 73 According to learning curve theory, the cost of a unit of production, the software module, will decrease by a fixed percentage for each doubling of the units produced. Since from unit 1 to unit 2 there was a 10% change in cost, the fixed percentage of reduction in cost was 90%. For unit 4, cost would be 81 personhours, 90% of 90 person-hours. For unit 8, it would be 90% of 81, or 73 personhours. 47. (b) Parametric modeling is a mathematical formula that uses variables to produce cost estimates. Parametric modeling uses variables-or parameters-to produce cost estimates. Contingencies are also known as reserve time and are used in the Activity Duration Estimating process. 48. (d) All projects have one cost baseline Many projects, especially larger ones may have multiple cost baselines to measure different aspects of the cost performance. - PMBOK 2000 Page 90 49. (c) 25,740 The EAC is calculated by dividing the BAC by the CPI for the week being calculated. It is the estimated cost of the project that is expected at the end of the project based on what we know about cost performance today. EAC = BAC / CPI; EAC = 20,000 / .7777 = 25,740. 50. (b) It can be easily created and updated as necessary. 51. (d) It specifies preferred tool to be used for cost estimating PMBOK 2000 Page 89 52. (a) The information available is not sufficient to assess project performance. 53. (b) Budget at completion, earned value, and actual cost The estimate to complete is calculated by EAC EV. It is the difference between the work completed, EV, and the estimate of the project at the end of the project. Since the EAC and the EV are not choices, we need to look further. The EAC is BAC / CPI. The CPI, EV, and the BAC are not offered either. The CPI is EV / AC. Therefore, the three factors needed are the BAC, EV, and AC. 54. (c) Anticipating delays, the project had to be crashed to decrease duration Option 1 and Option 4 increase the schedule - but since the project duration is not a problem (i.e SPI is > 1), we can ignore these choices. Choice 2 should have decreased cost and increased the CPI - so this is not a reason why cost of the project became more than what was anticipated. Choice 3 is the only alternative which could have increased the cost because crashing of project usually results in increased cost - so, this would have made CPI less than 1. 55. (c) Ahead, because the result of the variance formula is positive. Schedule variance tells you if the schedule is ahead or behind what was planned for this period and is calculated by subtracting PV from EV. In this case, the

formula looks like this: 95 - 85 = 10. The resulting number is positive, which means the schedule is ahead of what was planned for this time period. 56. (d) $101,400 The programmer will be paid for twenty-six weeks of work. The productivity and utilization factors affect the amount of time that someone is paid in comparison to the hours of effort required to complete the work. In this case the utilization and productivity are not required to calculate the cost: 26 weeks 40 hours per week $50 per hour 1.3 fringe benefits 1.5 overhead = $101,400. 57. (d) 20,000 The BAC or the budget at completion is the sum of the expenditures that are currently planned for the project. It is the sum of the EV for each task in the project and will not change from week to week unless the budget for any task is changed. 58. (a) Analogous estimating techniques Analogous-or top-down-estimating techniques are a form of expert judgment. Since this project is similar to another recent project, you can use the cost estimates from the previous project to help you quickly determine estimates for the current project. 59. (d) $11,025 The formula for future value is FV = PV(1 + i)n. Plugging in the information from the question, the formula becomes $10,000 (1 + .05) 2 = $11,025. 60. (d) EAC Estimate at completion (EAC) is the expected cost of the work when completed. 61. (d) For any project, Benefits = Profits Benefits are not profits, Benefits = Revenues/Payback 62. (b) 190.4 The EAC formula for this question is AC + ((BAC - EV) CPI). CPI = EV AC. First, calculate CPI: 145 138 = 1.05. Plugging in the numbers from the question, you get 138 + ((200 - 145) 1.05) = 190.4. 63. (c) Decision models Benefit measurement methods and constrained optimization methods are also known as decision models. They are a tool and technique of the Initiation process. 64. (c) Project C Payback period is the least precise of all cash flow calculations, so you shouldnt give this a lot of consideration if NPV is positive and IRR is greater than 0. Since Project B and Project D both have negative NPV, they shouldnt be chosen. Project C has a higher IRR value than Project A and should be the project you choose, even though its payback period is longer than project A. 65. (b) -2,000 The cost variance is the earned value minus the actual cost. CV = EV AC; CV = 7,000 - 9,000 = - 2,000. 66. (b) -50,000 The net cash flow is the total of all the cash flows in and out of the company caused by the project. In this example there was a flow of $850,000 in and $900,000 out for a negative $50,000.

67. (a) A decision cannot be made based on this information alone, because the payback periods are the same. The payback period for both of these alternatives is the same, so you cannot choose between them based on this information alone. The payback period for Alternative B is calculated as follows: Year 1 inflows = $36,000, Year 2 inflows = $36,000, for a total of $72,000 in 24 months. The first quarter of the next year inflows = $4,000, bringing the total to the initial investment of $76,000. The payback period is 27 months. 68. (d) The BAC is equal to the EV. The project is completed when all of the work is done. The EV represents the work that is completed. The BAC represents the total of the work that is planned to be done. When the EV equals the BAC, all of the work must be done. 69. (b) Life cycle costing The Project Cost Management knowledge area technique used when evaluating various alternatives is called life cycle costing. This technique considers acquisition, operating, and disposal costs. 70. (c) Replace the existing machine with a new machine costing $75,000 If production were expected to continue for three years, this would mean the production of another 36,000 units. This is beyond the break even point for the most expensive machine, the one representing the $75,000 investment. Beyond the 25,000th unit this is the preferred machine to buy. 71. (b) Cost variances. 72. (b) Average unit cost decreases as more units are produced. In learning curve theory, each time a task is done the amount of time and cost involved in doing the task decreases. For each doubling of the number of units produced, the cost of producing the units decreases by a fixed percentage. 73. (a) Activity listings. Listings of activities are usually not part of an analogous estimate. In analogous estimates large portions of the project are estimated by comparing and scaling similar parts of other projects. 74. (b) 6,500 When it is found that work that had been previously credited with its earned value and then later it is found that the value of the completed work was not completely delivered, the earned value should be reversed from the total earned value. In this case, since the amount of undelivered work was identified, only that amount was reversed. If the value missing was not identified but the work was shown to be incomplete, the entire earned value of the work would be reversed. When the work is finally completed, the earned value is credited to the earned value column again. 75. (c) $65,250 The sum of the years' digits calculation for depreciation is done by summing the digits of each of the years of the useful life, 1 + 2 + 3 + 4 + 5 + 6 + 8 + 9 + 10 = 55. The digits are reversed and divided by the total to get the percent of the value to be taken that year. In the third year it would be 8/55 = .145. The value is the equipment minus the scrap value or $450,000. So we have .145 X $450,000 = $65,250.

76. (c) Functional managers external to the project typically manage project budgets when the resource or project costs are the largest expense of the project. Projects with large budgets may or may not be managed by the project manager. There are no rules or guidelines that state that projects with large project expense budgets be managed by a functional manager. 77. (c) When a project is performed under contract, quantitative cost estimates determine how much the organization will charge for producing the product or service of the project. When a project is performed under contract, pricing determines how much the organization will charge for producing the product or service of the project. 78. (d) Alternatives Identification Please refer to Fig 7-1 - Alternatives Identification is a tool for Resource Planning, not Cost Estimating - PMBOK 2000 Page 84 79. (b) CPI < 1. 80. (c) Life cycle cost Life cycle costs are those associated with the project during the entire life of the project. These costs affect the way we think of the project since a poorly done project may finish below its intended budget but result in long term warranty and repair costs that are greater than the money saved. 81. (c) Parametric Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when the historical information used to develop the model was accurate, the parameters used in the model are readily quantifiable, and the model is scalable (i.e., it works as well for a very large project as for a very small one). 82. (b) Earned Value 83. (b) EAC = 550,000. 84. (b) Time phased budget for the project The cost baseline is the time-phased budget for the project. It is usually shown as the PV curve on the earned value report and is usually shown as a cumulative value of the project budget over time. It will usually have a characteristic "S" shape to it. The contingency reserve and the management reserve are added to the project budget and baseline when and if they are needed to resolve risks that have actually taken place. 85. (a) A critical resource went on sick leave for a long period of time, and this had not been anticipated earlier. Option 2 and Option 3 increase the costs - but since the project cost is not a problem (i.e CPI is > 1), we can ignore these answers. Choice 4 was a known factor, and provision should have been made in the project schedule for it. Choice 1 is the only alternative that could have increased the schedule time and made SPI < 1. 86. (b) The client has authorized a $10,000 addition to the scope of the project. The only reason for changing the project's budget is a change in the project budget baseline. This can be brought about by the customer authorizing an addition to the scope of the project.

87. (c) Project 1 Weighted scoring models use the weight of the criteria multiplied by the score to derive an overall score. Project 1s score is 47, Project 2s score is 45, and Project 3s score is 42. Based on this information, Project 1 is the best choice. 88. (c) Project A IRR is the discount rate when the present value of the cash inflows equals the original investment. Project As original investment equals the present value of its cash inflows at a discount rate of eight percent. Therefore, Project A has the highest IRR and should be chosen above the other two. 89. (d) NPV and IRR will generally give you the same accept/reject decision. NPV and IRR will generally bring you to the same accept/reject decision. 90. (b) Less than the total cash flow without the net present value applied. Calculating the net present value of the cash flows for the project involves adjusting the future cash flows to allow for diminishing value due to the time that we must wait to get them. Money received today is more valuable to us than money that will be received in the future. 91. (d) There isnt enough information in the question to determine an answer. There isnt enough information in this question to determine an answer. Payback period is the least precise of cash flow analysis techniques, but in this question, the payback periods are all the same. Initial investment isnt enough information to help choose among the projects. 92. (c) Sum of the years' digits Sum of the years' digits is an accelerated depreciation method. Each year of the useful life of the asset is given a sequential number; the numbers are summed and used as the denominator for a fraction of the asset's book value to be taken each year as depreciation. The numerator of the fraction for each year is the reverse of the years' sequence numbers. 1+2 + 3 + 4 + 5 + 6 + 7 + 8 + 9+10 = 55 First year use 10/55; second year use 9/55, and so on. 93. (b) 55 First, you need to know EAC. The EAC formula for this question is (AC + BAC) - EV. Plugging in the numbers from the question, you get (138 + 200) - 145 = 193. ETC = EAC - AC. Therefore, 193 - 138 = 55. 94. (b) $16,927 To calculate the cost of 100 hours of effort we must adjust for the person's utilization and productivity. People of lower productivity take longer to do work and make more mistakes but usually cost less since they are usually younger and less experienced. This can often be economical. The calculation is 100 hours / .72 / .8 $50 per hour 1.3 fringe benefit 1.5 overhead. 95. (b) Reduce the probability of cost overruns. Including a contingency budget will set aside money for known, identified risks. This will give more control to the project and reduce the problem of known risks using budget that was set aside for the work of the project and causing a cost overrun in the project. 96. (d) Benefit/cost analysis may incorporate several financial measures-including return on investment and payback period-to determine the baseline for cost

measurement control. Benefit/cost analysis is a technique used to consider the costs and benefits of various project or product alternatives. It includes techniques such as return on investment and payback period. 97. (a) Alternative A will earn a return of at least 12 percent. A positive value for NPV means the project will earn a return at least equal to or greater than the cost of capital. Since NPV for Alternative A is positive, this alternative will earn at least a 12 percent return. 98. (a) 1.1 and .95 CPI = EV - AC; therefore, 114 - 103 = 1.1. SPI = EV - PV; therefore, 114 - 120 = .95. 99. (d) It is the time when cumulated net income is equal to the investment. 100. (d) The bulk of the project budget will be spent in the execution phase. Most of the project money will be spent during the execution phase. At the beginning of execution the rate of expenditures rises as people and materials are brought into the project. Later the expenditures peak and slow down.