CHAPTER 8:PROJECT COST MANAGEMENT

QUESTIONS:


1.Question: As a project manager, you are aware that estimating schedule activity costs involves developing an approximation of the costs of the resources needed to complete each schedule activity.

In approximating costs, the estimator considers the possible causes of variation of the cost estimates, including risks. Cost estimating includes identifying and considering various costing alternatives. For example, in most application areas, additional work during a design phase is widely held to have the potential for reducing the cost of the execution and product operations.

The cost estimating process considers whether the expected savings can offset the cost of additional design work. Cost estimates are generally expressed in units of currency to facilitate comparisons both within and across projects. Cost estimates can also benefit from refinement during the course of the project to reflect on the additional detail available.

For your project, which is in the initial phases, your team suggested a rough order of magnitute estimate - this could be in the range of :
1. -75 to +125%
2. -50 to +100%
3. -25 to +50%
4. None of the above
2.Question: All the following tools can be used for cost estimating EXCEPT:
1. Analogous Estimating
2. Vendor Bid Analysis
3. Organizational Process Assets
4. Cost of quality
3.Question: In your company, Payback period is primarily used as the decision criteria for project selection. Payback period is the:
1. Number of years for a company to get back the invested amount
2. Discount Rate on an investment that makes present value of all cash inflows = present value of all cash outflows
3. The duration in which the project gets completed
4. Number of years for a company to make profits equal to the amount invested
4.Question: In your project, you have reason to believe that the current variances occurred because of extraneous factors, and you do not expect similar variances to happen in the future. What should be the Estimate at Complete for your project?

* BAC = $ 300,000
* AC = $ 100,000
* EV = $ 150,000
* CPI = $ 1.5
1. $ 250,000
2. $ 220,000
3. $ 280,000
4. $ 200,000
5.Question: You were talking with your finance manager who mentioned that for accounting purposes, your property depreciates by the same amount every year. This is also called:
1. Sum of the Year Digits
2. Accelerated Depreciation
3. Straight Line Depreciation
4. Double Declining Balance

6.Question: Three projects are being considered to be taken up by the company

* Project A has an NPV of $ 500,000
* Project B has an NPV of $ 300,000
* Project C has an NPV of $ 200,000

What is the opportunity cost if project A is selected?
1. $ 500,000
2. $ 200,000
3. $ 300,000
4. 0

7.Question: You would like to compare financially the costs involved in your project with other similar projects done by your organization in the past. A good way to do these comparisons is by using:
1. Activity Duration Estimates
2. Cost Estimates
3. Cost Management Plan
4. Bottom up Estimating

8.Question: All the following statements relating to Life Cycle Costs are correct except:
1. Includes Direct and Indirect Costs
2. Includes periodic or continuing costs of operation and maintenance
3. In selection criteria for two projects, even if one project has a lower NPV, it may be selected if it has a Lower Life Cycle Cost.
4. Life Cycle costs are the responsibility of a project

9.Question: A parametric modeling technique will be accurate in predicting project costs in all the following conditions EXCEPT:
1. Historical information available is accurate
2. Parameters are quantifiable
3. The project is a small project
4. Model is Scalable

10.Question: There are two projects:

* Project A has an investment of $ 1,000,000 and NPV of $ 100,000
* Project B has initial investment of $ 1,200,000; net cash inflows of $ 2,000,000 and net cash outflows of $ 1,900,000

Which project should be selected if Net Present Value criteria is used for selection?
1. Project A
2. Project B
3. Information in question not enough to determine which project to be selected
4. Either project A or project B can be selected

11.Question: In your project, you are trying to estimate schedule activity costs by determining the unit cost rates e.g. as staff cost per hour. All the following could be used to determine resource cost rates except:
1. Statistical relationship between historical data and other variables
2. Gathering quotes
3. Standard rates with escalation factors (for contracts)
4. Commercial databases or seller published price lists

12.Question: In your construction project, the CPI is 1.30 and SPI is 0.85. What could be the potential reason ?
1. A critical resource went on sick leave for a long period of time, which had not been anticipated earlier.
2. The cost of raw materials required for construction increased 10%
3. You had not taken into account inflation rate.
4. There was 4 days waiting time in the curing of cement, and work could not be done during that time

13.Question: In your project, you have determined the planned quantity of work to be performed. Luckily a similar project was successfully completed 3 months ago and historical information from that project is readily available. To get a cost estimate for your project, you multiply the planned quantity of work for your project with the cost per unit you got from the previous project. This is a classic example of :
1. Analogous estimating
2. Determining Resource cost rates
3. Bottom-up estimating
4. None of the above

14.Question: In a project you are presented with following four options. Which project should you select?
1. Project A with Opportunity Cost of $ 100,000
2. Project B with Benefit-Cost Ratio of 0.75
3. Project C with IRR of -2%
4. Project D with NPV of $ 100,000

15.Question: Your Director is proactive in trying to identify all the projects in his portfolio which are going over budget. For this, he requests every project manager in his group to provide a:
1. Performance Report
2. Cost Management Plan
3. Cost Baseline
4. Performance Measure

16.Question: Project cost management must consider the effect of project decisions on the cost of the product created by the project. Your objective to reduce cost and time, improve quality and performance, and optimize decision making can be facilitated using tool(s) like: (select best answer)
1. Value Engineering
2. Life Cycle Costing
3. Payback Period
4. Value Engineering and Life Cycle Costing

17.Question: The interest rate used in your company to calculate Present Value of expected yearly benefits and costs is also referred to as:
1. Interest Rate
2. Discount Rate
3. Internal Rate of Return
4. Benefit Cost Ratio


18.Question: All the following statements relating to Cost Management Plan are accurate except:
1. Specifies the precision level to which schedule activity cost estimates will adhere to
2. Establishes variance thresholds for costs or other indicators
3. Defines formats for various cost reports
4. Specifies preferred tools to be used for cost estimating

19.Question: Which project will be selected from the following options?
1. Internal Rate of Return of 12%, Opportunity cost $ 0
2. Internal Rate of Return of - 2%, Opportunity Cost of $ 20,000
3. Benefit cost ratio of 0.5, Payback Period of 6 months
4. Internal Rate of Return of 0%, Opportunity Cost of $ 200,000

20.Question: All the following statements about Cost Baseline are correct EXCEPT:
1. It is a time phased budget
2. To measure disbursements, a spending plan can be used as a cost-baseline
3. It is used to measure and monitor project performance
4. All projects have one cost baseline

21.Question: All the following statements related to Benefit Cost Ratio (BCR) are correct Except:
1. Projects with BCR > 1 should be considered for selection
2. BCR is the ratio of payback to costs
3. If two projects have positive BCR, select project with higher BCR
4. For any project, Benefits = Profits

22.Question: Your business partner is ready to invest $ 112,000 in your company one year from now. The interest rate used in your company to calculate Present Value of expected yearly benefits and costs is 12%. What is the Present Value of this investment?
1. $ 112,000
2. $ 100,000
3. $ 80,000
4. $ 80,000

23.Question: In your project, there have been several changes in the cost and schedule estimates and the original estimating assumptions are no longer valid. What is the Estimate at Complete for your project?

* BAC = $ 300,000
* AC = $ 100,000
* EV = $ 150,000
* CPI = $ 1.2
* ETC = $ 120,000
1. $ 250,000
2. $ 220,000
3. $ 280,000
4. $ 300,000

24.Question: Which of the following is an output from Cost Control process?
1. Schedule estimate (updates)
2. Forecasted completion
3. Cost Change control system
4. Work performance information

25.Question: Project A had initial budget of $ 1,000 out of which $ 800 has already been spent. To complete project A, we will an need additional $ 500. Another Project B will require $ 1200 for completion. For the selected project, what is the ETC?
1. $ 800
2. $ 1,000
3. $ 500
4. $ 1200


ANSWERS:
1. Ans: 2
Justification: A project in the initiation phase could have a rough order of magnitude (ROM) estimate in the range of -50 to 100%

Reference: PMBOK Third Edition, Page Number: 161


2. Ans: 3
Justification: Organizational process assets is an input to the Cost Estimating process (not a tool) Refer figure 7-3

Reference: PMBOK Third Edition, Page Number: 162



3. Ans: 1

Justification:



Reference: pmstudy.com notes as mentioned above


4. Ans: 1
Justification: Since current variances are atypical, Estimate at Complete, EAC = AC + (BAC - EV) = $ 100,000 + ($ 300,000 - $ 150,000) = $ 250,000




5. Ans: 3
Justification:






6. Justification: Opportunity cost is the cost of passing up the next best option.

So, the opportunity cost of choosing A (over project B, which is the next best option) = profit given up if Option B is chosen = profit of Option B = $ 300,000
Ans: 3


7. Justification: Cost estimates are generally expressed in units of currency (dollars, euro, yen, etc.) to facilitate comparisons both within and across projects.

Reference: PMBOK Third Edition, Page Number: 161
Ans: 2


8. Justification: Life cycle costs include cost of operations, which are beyond the scope of the project.
Ans: 4





9. Justification: 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)

Reference: PMBOK Third Edition, Page Number: 169
Ans: 3


10. Ans: 4
Justification: Project A NPV = $ 100,000

Project B NPV = $ 2,000,000 - $ 1,900,000 = $ 100,000

So, both projects have same NPV - hence either project may be selected using the NPV method.






11. Justification: Parametric estimating is a technique that uses statistical relationship between historical data and other variables - all the other options are valid ways to Determine Unit cost rates

Reference: PMBOK Third Edition, Page Number: 165
Ans: 1


12. Justification: 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.



commments: Also, please refer to PMBOK page 173, 174

Ans: 1


13. Justification: Parametric Estimating : ... A cost related example involves multiplying the planned quantity of work to be performed by the historical cost per unit to obtain the estimated cost

Reference: PMBOK Third Edition, Page Number: 165
Ans: 4


14. Justification: 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


Ans: 4


15. Justification: Performance reports provide information on the project scope and cost performance, such as which budgets have been met and which have not - Performance Reports also alert the project team to issues that may cause problems in the future.

Reference: PMBOK Third Edition, Page Number: 153
Ans: 1

16. Justification: Life cycle costing together with Value Engineering, can improve decision making and is used to reduce cost and execution time and to improve the quality and performance of the project deliverable.

Reference: PMBOK Third Edition, Page Number: 157
Ans: 4


17. Ans: 2
Justification:




18. Justification: Cost management plan does not specify preferred tools to be used for cost estimating
commments: Also, please refer to PMBOK page 158, 159
Ans: 4


19. Justification: The only suitable option is Choice 1, because the Internal Rate of Return is positive i.e. 12%

All other options do not show a positive selection criteria for the project.
Ans: 1




20. Justification: Many projects, especially large ones may have multiple cost and resource baselines, and consumables production baselines to measure different aspects of project performance.

Reference: PMBOK Third Edition, Page Number: 170
Ans: 4


21. Ans: 4
Justification: Benefits are not profits, Benefits = Revenues/Payback




22. Justification: The interest rate (r) used calculate Present Value of expected yearly benefits and costs is the discount rate i.e. 12% in this example

PV = 120,000 / (1 + 12/100) = 100,000
Ans: 2



23. Ans: 2

Justification: Since Original Estimating Assumptions are no longer valid, EAC = AC + ETC = $ 100,000 + $ 120,000 = $ 220,000




24. Justification: Figure 7-6

Reference: PMBOK Third Edition, Page Number: 171
Ans: 2


25. Justification: Since $ 1,000 is the sunk cost, we ignore it in our calculations. So, it is beneficial to select Project A and ETC(Estimate to Complete) for Project A will be $ 500
Ans: 3