Additional Cost Questions - GDAS PMP Study Group Presentation

8/6/2019 Additional Cost Questions - GDAS PMP Study Group Presentation

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© 2005 Hewlett-Packard Development Company, L.P.The information contained herein is subject to change without notice

GDAS PM Professions:PMP Study Group

Additional Cost Questions



Question No : 1

There are two projects:

Investment in project A is $ 1,000,000 and its NPV is $ 100,000

Investment in project B is $ 1,200,000, its net cash inflows are $ 2,000,000, and net cash outflows are $1,900,000

Which project should be selected if net present value(NPV) criterion is used for selection?

Choice 1 Project AChoice 2 Project BChoice 3 The information in the question is inadequateChoice 4 Either project A or project B



Question No : 1

There are two projects:

Investment in project A is $ 1,000,000 and its NPV is $ 100,000

Investment in project B is $ 1,200,000, its net cash inflows are $ 2,000,000, and net cash outflows are $1,900,000

Which project should be selected if net present value(NPV) criterion is used for selection?

Choice 1 Project AChoice 2 Project BChoice 3 The information in the question is inadequateChoice 4 Either project A or project B

Correct Choice : 4

Justification : NPV of project A = $ 100,000 NPV of project B = $ 2,000,000 - $ 1,900,000 = $ 100,000 Bothprojects have the same NPV; therefore, either project may be selected, if NPV criterion is used.

Reference: PMstudy.com comments



Question No : 2

Y ou are given the following four projects. Which project will you select?

Choice 1 Project A with an opportunity cost of $ 100,000Choice 2 Project B with a benefit-cost ratio of 0.75Choice 3 Project C with an IRR of -2%Choice 4

Project D with NPV of $ 100,000 <



Question No : 2

Y ou are given the following four projects. Which project will you select?

Choice 1 Project A with an opportunity cost of $ 100,000Choice 2 Project B with a benefit-cost ratio of 0.75Choice 3 Project C with an IRR of -2%Choice 4 Project D with NPV of $ 100,000 <

Correct Choice : 4

Justification : If Project B and project C are selected the company would suffer losses. Project A is not selected,because opportunity cost is not a project selection criterion. Project D is the only suitable option, because thisproject has a positive NPV and hence could be selected.




Question No : 3

While reviewing the performance reports of your project, you notice that the Cost Performance Index (CPI) is 1.2and Schedule Performance Index (SPI) is 0.8. In this case you should:

Choice 1 Make changes to the performance baseline to improve the SPIChoice 2 Evaluate options to crash or fast-track the projectChoice 3 Inform the management why the project got delayedChoice 4 Tell the team-members that they have no option but to meet the target dates as stated in the project

schedule





Question No : 4

Which project will be selected from the following options?

Choice 1 Project A: internal rate of return of 12%, opportunity cost $ 0Choice 2 Project B: internal rate of return of - 2%, opportunity cost of $ 20,000Choice 3 Project C: benefit cost ratio of 0.5, payback period of 6 months

Choice 4 Project D: internal rate of return of 0%, opportunity cost of $ 200,000



Question No : 4

Which project will be selected from the following options?

Choice 1 Project A: internal rate of return of 12%, opportunity cost $ 0Choice 2 Project B: internal rate of return of - 2%, opportunity cost of $ 20,000Choice 3 Project C: benefit cost ratio of 0.5, payback period of 6 months

Choice 4 Project D: internal rate of return of 0%, opportunity cost of $ 200,000

Correct Choice : 1

Justification : The only suitable option is option 1, because the internal rate of return is positive, i.e., 12%. All other options exhibit unfavorable selection criteria. Opportunity cost is not a selection criteria.




Question No : 5

Y our business partner is ready to invest $ 110,000 in your company one year from now. The interest rate used inyour company to calculate Present Value (PV) of expected yearly benefits and costs is 10%. What is the PV of this investment?

Choice 1 $ 112,000Choice 2 $ 100,000Choice 3 $ 80,000Choice 4 $ 80,000



Question No : 5

Y our business partner is ready to invest $ 110,000 in your company one year from now. The interest rate used inyour company to calculate Present Value (PV) of expected yearly benefits and costs is 10%. What is the PV of this investment?


Correct Choice : 2

Justification : PV = 110,000 / (1 + 10/100) = 100,000

Reference: PMstudy.com study notes



Question No : 6

As a project manager, you estimate that, in your project, there is:

50% probability of earning $ 40,000 profit50% probability of incurring $ 25,000 loss

What is the expected profit/loss for the project?

Choice 1 $ 32,500Choice 2 $ 25,000Choice 3 $ 7,500Choice 4 - $ 7,500 (i.e. loss of $ 7,500)



Question No : 6

As a project manager, you estimate that, in your project, there is:

50% probability of earning $ 40,000 profit50% probability of incurring $ 25,000 loss

What is the expected profit/loss for the project?

Choice 1 $ 32,500Choice 2 $ 25,000Choice 3 $ 7,500Choice 4 - $ 7,500 (i.e. loss of $ 7,500)

Correct Choice : 3

Justification :

Expected Profit = Sum of (Probability X Profit) (for each alternative)= (0.50 x $ 40,000) + (0.50 x - $ 25,000)= $ 20,000 - $ 12,500= $ 7,500




Question No : 7

While doing monitoring and controlling for your project, you notice that the cost variance is negative, butschedule variance is positive. This indicates:

Choice 1 Cost and schedule are not dependent on each other Choice 2 Project is under budget and behind scheduleChoice 3 Project is over budget and ahead of scheduleChoice 4 Crashing may be recommended to make the cost variance positive



Question No : 7

While doing monitoring and controlling for your project, you notice that the cost variance is negative, butschedule variance is positive. This indicates:

Choice 1 Cost and schedule are not dependent on each other Choice 2 Project is under budget and behind scheduleChoice 3 Project is over budget and ahead of scheduleChoice 4 Crashing may be recommended to make the cost variance positive

Correct Choice : 3

Justification : Positive schedule variance means the project is ahead of schedule; negative cost variance meansthe project is over-budget.

Also, please note that crashing will increase costs and impact the cost variance adversely .




Question No : 8

Y ou are in the test phase of your software project, and the project sponsor has requested for a definitive estimate of when your project will be completed. The most likely estimated duration is 30 days. Which of the followingduration estimations will you give to your sponsor?

Choice 1 29 - 31 daysChoice 2 24 - 36 daysChoice 3 20 - 40 daysChoice 4 15 - 45 days



Question No : 8

Y ou are in the test phase of your software project, and the project sponsor has requested for a definitive estimate of when your project will be completed. The most likely estimated duration is 30 days. Which of the followingduration estimations will you give to your sponsor?

Choice 1 29 - 31 daysChoice 2 24 - 36 daysChoice 3 20 - 40 daysChoice 4 15 - 45 days

Correct Choice : 1

Justification : The different types of estimates are:

Definitive: - 5% to +10% accuracyBudgetary: -15% to +25% accuracyOrder of magnitude: - 50% to +50% accuracy

So, if -5% to +10% variation is allowable, only 29 - 31 days fits that criterion.




Question No : 9

The value of work actually accomplished is also known as

Choice 1 Planned ValueChoice 2 Earned ValueChoice 3 Actual CostChoice 4 Budgeted Cost for Work Scheduled (BCWS)



Question No : 9

The value of work actually accomplished is also known as

Choice 1 Planned ValueChoice 2 Earned ValueChoice 3 Actual CostChoice 4 Budgeted Cost for Work Scheduled (BCWS)

Correct Choice : 2

Justification :

Reference: PMstudy.com comments; Also, please refer to PMBOK® Guide Fourth Edition Page Number: 182



Question No : 10

The following are the details of a project: Payback: $2,000 Profit: $1,000 Project cost: $800 Life cycle cost: $1200What is the Benefit Cost Ratio for this project?

Choice 1 2.50Choice 2 1.25Choice 3 1.67Choice 4 0.83



Question No : 10

The following are the details of a project: Payback: $2,000 Profit: $1,000 Project cost: $800 Life cycle cost: $1200What is the Benefit Cost Ratio for this project?

Choice 1 2.50Choice 2 1.25Choice 3 1.67Choice 4 0.83

Correct Choice : 1

Justification : BCR = Payback/Project Cost = 2000/800 = 2.50




Question No : 11

Calculate the to-complete performance index of your project, when the actual cost of your project is $200,000, costvariance of your project is $25,000, and the budget at completion of your project is $350,000.

Choice 1 1.4Choice 2 -1.4Choice 3 1Choice 4 -1



Question No : 11

Calculate the to-complete performance index of your project, when the actual cost of your project is $200,000, costvariance of your project is $25,000, and the budget at completion of your project is $350,000.

Choice 1 1.4Choice 2 -1.4Choice 3 1Choice 4 -1

Correct Choice : 1

Justification :

CV= EV-ACEV = CV + AC= 25,000 + 200,000=225,000

CPI=EV/AC=225,000/200,000=1.125


EAC=AC+(BAC-EV)/CPI=200,000+(350,000-225,000)/1.125=200,000+(125,000)/1.125=288,888

TCPI = BAC-EV/EAC-AC= 350,000 ± 225,000/288,888±200,000= 125,000/88,888= 1.4



Question No : 12

Since you are in the preliminary stages of your project, you estimate that your project may be completed in oneyear. However, the optimistic estimate is 6 months and pessimistic estimate is 18 months. This type of estimateis also called:

Choice 1 DefinitiveChoice 2 Capital costChoice 3 Order of magnitudeChoice 4 Feasibility



Question No : 12

Since you are in the preliminary stages of your project, you estimate that your project may be completed in oneyear. However, the optimistic estimate is 6 months and pessimistic estimate is 18 months. This type of estimateis also called:

Choice 1 DefinitiveChoice 2 Capital costChoice 3 Order of magnitudeChoice 4 Feasibility

Correct Choice : 3

Justification : The different types of estimates are:Order of Magnitude: -50% to +50%Budget Estimates: -15% to +25%Definitive Estimates: -5% to +10%

Reference: PMstudy.com study notes

Please note that the estimate varies from 1 year - 6 months to 1 year + 6 months (i.e. -50% to +50% variation,we can call this an Order of Magnitude Estimate)



Question No : 13

In your new project the objective is to develop a new drug. After doing financial analysis, your finance manager provided you with these statistics:

30% probability of success with benefits of $ 700,00070% probability of failure with loss of $ 300,000

Based on this information, you:

Choice 1 Suggest that the project should proceed.Choice 2 Suggest that the project should be stopped.

Choice 3 Communicate to your senior management that you cannot take a decision whether to proceed with theproject or not.Choice 4 Start working on the project and ask your finance manager for additional information.



Question No : 13

In your new project the objective is to develop a new drug. After doing financial analysis, your finance manager provided you with these statistics:

30% probability of success with benefits of $ 700,00070% probability of failure with loss of $ 300,000

Based on this information, you:

Choice 1 Suggest that the project should proceed.Choice 2 Suggest that the project should be stopped.

Choice 3 Communicate to your senior management that you cannot take a decision whether to proceed with theproject or not.Choice 4 Start working on the project and ask your finance manager for additional information.

Correct Choice : 3

Justification :

Expected Value of the project

= Expected Value of success (0.30 * $ 700,000) + Expected value of Failure (0.70 * - $ 300,000)= 210,000 - 210,000= 0

Since the Expected Value is "0", you cannot take a decision whether to continue with the project or not.




Question No : 14

In your project, you have reasons to believe that the current variances occurred because of extraneousfactors, and you do not expect similar variances to occur in future. What should be the estimate atcompletion (EAC) for your project? BAC = $ 300,000 AC = $ 100,000 EV = $ 150,000 CPI = $ 1.5




Question No : 14

In your project, you have reasons to believe that the current variances occurred because of extraneousfactors, and you do not expect similar variances to occur in future. What should be the estimate atcompletion (EAC) for your project? BAC = $ 300,000 AC = $ 100,000 EV = $ 150,000 CPI = $ 1.5


Correct Choice : 1

Justification : Since current variances are atypical, Estimate at Completion, EAC = AC + BAC - EV = $ 100,000 +$ 300,000 - $ 150,000 = $ 250,000

Reference: PMstudy.com comments; Also refer to PMBOK® Guide Fourth Edition Page 184



Question No : 15

In your project, you have determined the planned quantity of work to be performed. Luckily, a similar project wassuccessfully completed three months ago, and historical information from that project is readily available. To geta cost estimate for your project, you multiply the planned quantity of work in your project with the cost per unitobtained from the previous project. This is a classic example of:

Choice 1 Analogous estimatingChoice 2 Determining resource cost ratesChoice 3 Bottom-up estimatingChoice 4 Parametric estimating



Question No : 15

In your project, you have determined the planned quantity of work to be performed. Luckily, a similar project wassuccessfully completed three months ago, and historical information from that project is readily available. To geta cost estimate for your project, you multiply the planned quantity of work in your project with the cost per unitobtained from the previous project. This is a classic example of:

Choice 1 Analogous estimating

Choice 2 Determining resource cost ratesChoice 3 Bottom-up estimatingChoice 4 Parametric estimating

Correct Choice : 4

Justification : Parametric estimating uses a statistical relationship between historical data and other variables tocalculate an estimate for activity parameters, such as cost, budget, and duration.

An example for the cost parameter is multiplying the planned quantity of work to be performed by the historicalcost per unit to obtain the estimated cost.

Reference: PMBOK® Guide Fourth Edition, Page Number:172 and 431



Question No : 16

What is the status of the project?

What is the Earned Value (EV)?




Question No : 16

What is the status of the project?

What is the Earned Value (EV)?


Correct Choice : 4

Justification : Earned Value (EV) = The sum of the approved cost estimates for activities completed during a givenperiod = Estimated cost of work that is completed after day 11 = $ 5,000 + $ 5,000 + $5,000*.50 = $ 12,500(because Tasks A and B are completed and Task C is 50% complete)




Question No : 17

While performing variance analysis for your project, you refer to your status reports which show the followinginformation:

Planned value = $ 100,000 Actual cost = $ 125,000Earned value = $ 90,000In this context, all the following statements are true EXCEPT:

Choice 1 Schedule variance is - $ 10,000 and you are behind scheduleChoice 2 Cost variance is - $ 35,000 and you are over-budgetChoice 3 CPI is 0.5 and you are over-budgetChoice 4 SPI is 0.9 and you are behind schedule



Question No : 17

While performing variance analysis for your project, you refer to your status reports which show the followinginformation:

Planned value = $ 100,000 Actual cost = $ 125,000Earned value = $ 90,000In this context, all the following statements are true EXCEPT:

Choice 1 Schedule variance is - $ 10,000 and you are behind scheduleChoice 2 Cost variance is - $ 35,000 and you are over-budgetChoice 3 CPI is 0.5 and you are over-budgetChoice 4 SPI is 0.9 and you are behind schedule

Correct Choice : 3

Justification :

CV (Cost Variance) = EV - AC = $ 90,000 - $ 125,000 = - $ 35,000 (since this is negative, you are over-budget)CPI (Cost Performance Index) = EV/AC = $ 90,000 / $ 125,000 = 0.72 (since this is <1, you are over-budget)SV (Schedule Variance) = EV - PV = $ 90,000 - $ 100,000 = - $ 10,000 (since this is negative, you are behindschedule)SPI (Schedule Performance Index) = EV/ PV = $ 90,000 / $ 100,000 = 0.9 (since this is <1, you are behindschedule)The above calculations show that all options except option 3 are correct .Hence, option 3 is the right answer.

Reference: PMstudy.com comments; Also, please refer to PMBOK® Guide Fourth Edition, Page Number:182 and183



Question No : 18

Please refer to the diagram given below.

At time x, the project is :

Choice 1 Behind schedule, over-budgetChoice 2 Ahead of schedule, over-budgetChoice 3 Behind schedule, under-budgetChoice 4 Ahead of schedule, under-budget



Question No : 18

Please refer to the diagram given below.

At time x, the project is :

Choice 1 Behind schedule, over-budgetChoice 2 Ahead of schedule, over-budgetChoice 3 Behind schedule, under-budgetChoice 4 Ahead of schedule, under-budget

Choice : 3

Justification : The diagram shows that at time x, SPI < 1 (i.e., behind schedule) and CPI>1 (i.e., under-budget).Please note that in earned value management calculations, ratios >1 is desirable.




Question No : 19

The actual cost of your project is $200,000, budget at completion is $325,000, and the cost variance is -$25,000.From the data above calculate the To-complete performance index of your project, given that , senior management did not agree to revise the estimate at completion based on current performance

AC = 200,000BAC = 325,000CV= -25,000

Choice 1 0.7Choice 2 1.2Choice 3 0.8Choice 4 1



Question No : 19

The actual cost of your project is $200,000, budget at completion is $325,000, and the cost variance is -$25,000.From the data above calculate the To-complete performance index of your project, given that , senior management did not agree to revise the estimate at completion based on current performance

AC = 200,000BAC = 325,000CV= -25,000

Choice 1 0.7Choice 2 1.2Choice 3 0.8Choice 4 1

Correct Choice : 2

Justification :

EV=AC+CVEV= 200,000-25000EV= 175,000

CPI=EV/AC=175,000/200,000=0.875

TCPI=(BAC-EV)/(BAC-AC)=(325,000 - 175,000)/(325,000 - 200,000)=150,000/125,000=1.2




Question No : 20

In your project, you estimate the cost of individual activities or work packages, and then roll up the individualestimates for subsequent reporting and tracking purposes. This can be done using:

Choice 1 Bottom-up estimatingChoice 2 Analogous estimatingChoice 3 Parametric modelingChoice 4 Top-down estimating



Question No : 20

In your project, you estimate the cost of individual activities or work packages, and then roll up the individualestimates for subsequent reporting and tracking purposes. This can be done using:

Choice 1 Bottom-up estimatingChoice 2 Analogous estimatingChoice 3 Parametric modelingChoice 4 Top-down estimating

Correct Choice : 1

Justification : Bottom-up estimating is a method of estimating a component of work. This technique is used toestimate the cost of individual work packages or activities at the greatest level of specified detail. The detailedcost is then summarized or ³rolled-up´ to higher levels for subsequent reporting and tracking purposes.

Reference: PMBOK® Guide Fourth Edition, Page Number:172

Additional Cost Questions - GDAS PMP Study Group Presentation

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