While there are about 50 formulas that you need to know for Project Management Professional (PMP)® Exam success, there are only seven that are absolutely necessary to know for the PMI Agile Certified Practitioner (PMI-ACP)® Exam.
Even better, for the first three we are going to discuss you don’t even need to know the formula. What you do need to know for them is how to handle the results of the calculations, which is: “The larger value is the better value”. Here they are:
1. Internal Rate of Return (IRR)
IRR is used as a capital project budgeting metric to determine if an investment should be made. It looks at the present value of the cash flows as compared to the initial investment which results in an IRR value. For example, if as a Project Manager you need to compare two or more projects to determine which one would be the better investment for your organization you can use IRR to do this. If you are given the IRR for three projects; Project A IRR =25%, Project B IRR = 30%, and Project C IRR = 12% you can determine that Project B is the better investment for the organization because it has the largest IRR value.
2. Net Present Value (NPV)
NPV is used as a capital project financial metric to analyze the profitability of an investment at the time of review. It looks at the present values of cash inflows and the present values of cash outflows resulting in an NPV value. A Project Manager can compare the NPV value of one or more projects to determine which project is a more profitable investment. For example Project A has an NPV of $2.3M, Project B has an NPV of $2M, and Project C has an NPV of $2.1M. Project A has the greater NPV and is the best investment for the organization.
3. Return on Investment (ROI)
ROI is used to evaluate the money gained or lost in relation to the money invested in a project. ROI is also often referred to as gain/loss, profit/loss, or net income/loss. A Project Manager can use the ROI of one or more projects to determine which project is the better investment. For example if Project A has an ROI of 27%, Project B has an ROI of 25%, and Project C has an ROI of 30%; Project C would be the better investment since it has the largest ROI.
The next four formulas we are going to discuss are true formulas because you will need to know specific information in order to perform each of the calculations discussed below.
4. Cost Variance (CV)
CV is the Earned Value minus the Actual Cost (CV=EV-AC) of a project. This formula measures the cost performance of a project, and looks at whether the project is on budget or not. In order to calculate CV you need two pieces of information, the earned value and the actual cost of the project. If a CV result is a negative number the project is over budget, which is bad. If a CV result is a positive number the project is under budget, which is good. If CV is zero, then the project is exactly on budget. For example project A has an earned value of $75.1M and an actual cost of $75.3M. The CV calculation would look like: CV= $75.1M - $75.3M; resulting in a CV of -$0.2M; this project is over budget. Another example would be Project B has an earned value of $15M and an actual cost of $14.5M. The CV calculation would look like: CV=$15M - $14.5M; resulting in a CV of $0.5M; this project is under budget.
5. Cost Performance Index (CPI)
CPI is Earned Value divided by Actual Cost (CPI=EV / AC). CPI measures the cost performance of a project; is the project budget being spent as planned? In order to calculate CPI you need two pieces of information, the earned value and the actual cost of the project. There are three possible results when calculating this: CPI = 1 is good and means funds are being used as planned; CPI >1 is also good and means the funds are being used more efficiently than planned; and CPI <1 is bad and means the funds are being over spent.
6. Schedule Variance (SV)
SV is the Earned Value minus the Planned Value (SV=EV-PV) of a project. This formula measures the schedule performance of a project, and looks at whether the project is behind schedule or ahead of schedule. In order to calculate SV you need two pieces of information, the earned value and the planned value of the project. If an SV result is a negative number then the project is behind schedule, which is bad. If an SV result is a positive number then the project is ahead of schedule, which is good. If SV is zero, then the project is exactly on schedule. For example project A has an earned value of $75.1M and an actual cost of $74.2M. The CV calculation would look like: CV= $75.1M - $74.2M; resulting in a SV of $0.9M; this project is ahead of schedule.
7. Schedule Performance Index (SPI)
SPI is Earned Value divided by Planned Value (SPI=EV / PV). This formula measures the schedule performance of a project, is the project performing as planned? In order to calculate SPI you need two pieces of information, the earned value and the planned value of the project. There are three possible results when using this formula: CPI = 1 is good and shows the project is progressing as planned; CPI >1 is also good and shows the project is progressing at a faster rate than planned; and CPI <1 is bad and shows the project tis progressing at a slower rate than planned.
As you can see, the focus on the PMI-ACP® Exam is not really on the mathematics. For this exam it is more important to understand the concepts, methods, tools and techniques as well as the Agile Manifesto in order to pass. However, a good understanding of these seven formulas will go a long way.
