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Project Management Formulae Acronyms Used AC Actual Cost of the Work Performed earlier name used ACWP BAC Budget at Completion (Project budget) CV Cost Variance CPI Cost Performance Index EAC Estimate At Completion (measures total work when the project is complete) EF Early Finish ES Early Start ETC Estimate To Complete (measures work which is still outstanding) EV Earned Value earlier name used - BCWP - Budgeted cost of work performed IRR Internal Rate of Return LF Late Finish LS Late Finish NPV Net Present Value PV Planned Value earlier name used BCWS -Budgeted cost of work scheduled SV Schedule Variance SPI Schedule Performance Index
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VAC Variance at Completion
Cost Formulae
CV = EV - AC CPI = EV / AC
CV also known as project progress measure formula. CV (Cost Variance) measures money. Positive values indicates project is in good condition (Project NOT over budget) CPI indicates efficiency. Values grater than 1 (one) indicates project is in good condition
Schedule Formulae
SV = EV - PV SPI = EV / PV
SV also known as Project progress measure formula. SV (Schedule Variance) measures time. Positive values indicates project is in good condition (Project NOT over time - ahead of schedule) SPI also known as project efficiency indicator. SPI indicates efficiency. Values grater than 1 (one) indicates project is in good condition
Forecasting Formulae
EAC = BAC / CPI (simplest formula: typical or no variances) EAC = AC + (BAC - EV) (atypical variances) EAC = AC + (BAC - EV) / CPI (typical variances) EAC = AC + ETC ETC = BAC - EV (atypical variances) ETC = (BAC - EV) / CPI (typical variances)
EV = (% complete) * BAC VAC = BAC - EAC Description Formula Comments, assuming, at the time of calculation
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EV Estimated value of work completed Estimated value of work completed CV EV AC Positive Good Under budget Negative not good- Over budget 0 (zero) not bad on budget CPI EV AC Values grater than 1 (one) indicates project is in good condition - For every $1 spent, getting more and $1. PV (Time now total time ) x total cost- BAC What should be the present value of project SV EV PV Positive Good Ahead of schedule Negative not good- Behind schedule 0 (zero) not bad on schedule SPI EV PV Values grater than 1 (one) indicates project is in good condition BAC Total budget for project Total budget for project EAC BAC CPI (when no change in total cost of project)
AC + ETC ( when extra cost/time added to complete the task)
AC + (BAC EV) (when there is a non-uniform variance in original estimates)
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AC + ((BAC EV) CPI) (when there is an uniform variance in original estimates)
ETC EAC AC Extra cost to original estimates VAC BAC EAC Changes in original estimates
A project authorized for cost of $100,000 for duration of 1 year. The project just completed 6 months and the amount spent so far is $60,000 and the work completed is 60%. EV % Completed x BAC 60000 CV EV AC 0 (zero) not bad on budget CPI EV AC 1 (one) not bad on budget PV (6 16 ) x 100,000 $50,000 SV EV PV 10,000 Good Ahead of schedule SPI EV PV 1.2 indicates project is in good condition BAC 100,000 (Given) Total budget for project EAC 100,000 1 100,000 on budget ETC 100,000 60000 $40000 required to complete the project VAC 100,000 100,000 No change in initial estimated cost
PERT Formulae for Activity Duration Estimating
Activity Length = (P+4M+O) / 6 ( Also called Three point Estimate)
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Where, P is the pessimistic estimate, O is the optimistic estimate and M is the most likely estimate.
PERT is probabilistic, using statistical estimates of durations. Whereas, CPM is deterministic, using specific durations.
Critical Path Method Formulae for Activity Duration Estimating
Activity Duration = EF - ES or LF - LS Activity Float = LS - ES or LF - EF
CPM is deterministic, using specific durations. Whereas, PERT is probabilistic, using statistical estimates of durations.
Quality Formulae (Normal Distribution)
1 (sigma) = 68.26% 2 (sigma) = 95.46% 3 (sigma) = 99.73% 6 (sigma) = 99.99985% (say, out of 100,000 products less than 1.5 project will pave problem) Financial Formulae (Used in budgeting and project selection)
Payback period (PP) Number of years until the sum of future cash flows equals the initial investment. In other words PP represents the amount of time that it takes for a capital budgeting project to recover its initial cost.
PP = The costs of project or investment Annual Cash Inflows
There are at least two major drawbacks associated with the Payback Period model:
1. PP ignores any benefits that occur after the Payback Period, and so does not measure total incomes
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2. PP ignores the time value of money
Example of a Payback Period calculation:
A project costing a total of $400,000. The expected returns of the project amount to $50,000 annually.
Payback period (PP) would be $400,000 $50,000 = 8 years. If project A has PP of 2 years and Project B has 4 years. Prefer higher lesser PP project
Net Present Value
The Net Present Value (NPV) of an investment (project) is the difference between the sum of the discounted cash flows which are expected from the investment and the amount which is initially invested. NPV is an amount that expresses how much value an investment will result in. This is done by measuring all cash flows over time back towards the current point in present time. If the NPV method results in a positive or More amount, the project should be undertaken. Although NPV measurement is widely used for making investment decisions, a drawback of NPV is that it does not account for flexibility or uncertainty after the project decision.
NPV calculation in three steps:
1. Calculation of expected free cash flows ( per year) that result out of the investment 2. Subtract (discount) for the cost of capital (an interest rate to adjust for time and risk) - This gives Present Value. PV: The present value is the discounted value of a future cash flow. A "discount" is required because the present value of money is greater than the future value (FV) of money. PV = FV/(1 + r) n , where r is the interest rate (or cost of capital) and n is the years. 3. Subtract the initial investments.
Examples: What is the present value of an investment which pays $400,000 eight years from now with an interest rate of 20% ?
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Present Value = $400,000 (1 + 0.20) 8 $93027 What is the present value of $400,000 received eight years from now with an interest rate of 20% ? is PV is more, less or equal to $400,000. Answer: Less (see above calculation)
A project cost of $400,000 and assume cost of capital is 20% NPV for eight (8) years
Year PV Year 1 333333 Year 2 277778 Year 3 231481 Year 4 192901 Year 5 160751 Year 6 133959 Year 7 111633 Year 8 93027 Present Value is $1534864. NPV = $1,534,864 $400,000 = $1134864 If project A has NPV of $1000 and Project B has $2000. Prefer higher NPV project IRR - the Internal Rate of Return is the discount rate when the present value of cash flows is the same as the initial investment. Higher IRRs are preferred to lower ones. IRR is determined by trial and error, computing NPV with various interest rates. If project A has IRR of 30% and Project B has 20%. Prefer higher IRR project Communication Formula: Communication Channels = (N * (N-1)) / 2 Where N is the number of stakeholders Let us say, Your project has 10 member team (including you), the communication channels are: (10 x (10 1)) 2 = (10 x 9) 2 = 45 channels Note: This document is not review yet