Earned Value Formula

One of the important formulas, used in the Monitoring and Control Process group. Earned Value is a Performance Measurement technique. It is also called as "Budgeted Cost of Work Performed". It is used to evaluate the extent of work completed and take any corrective actions to put the project execution back on track.

PMBOK 2004 says "Earned value is the budgeted amount for the work actually completed on the schedule activity or WBS component".

It is calculated by comparing the actual amount of work against the budget. Earned value by itself cannot produce any useful evaluation report without the parameters like Actual Cost spent and Planned Value. It is calculated as follows.

Earned Value = Budget At Completion * Percent Complete

where
Budget At Completion - Total Budget of the Project
Percent Complete - is the percentage of work complete at the point of time of measurement.

As a performance measurement technique, Earned value is used to calculate 4 different measures for assessing the progress of the project. It is used for calculating Cost Variance, Schedule Variance, Cost Performance Index (CPI) and Schedule Performance Index (SPI). There is no need to define them here as the name of each of them clearly convey their definition and intent of their calculation.

To calculate the above values,

Cost Variance = Earned Value - Actual Cost
Schedule Variance = Earned Value - Planned Value
Cost Performance Index(CPI) = Earned Value / Actual Cost
Schedule Performance Index(CPI) = Earned Value / Planned Value


The above formulae results can be used to elucidate if the project is on track with its cost and schedule. If the Cost Variance is in the positive territory, it means the project is spending less than budgeted. To actually confirm that this is a really good news of cost savings we also need to check the schedule variance. If the schedule variance is also positive, it really means a good news. Sometimes a negative schedule variance could mean that the cost savings is because of some resource was absent or not available as planned etc., which may not really be good news.

The CPI and SPI should also typically give similarly suggestive results. For example if the CPI is greater than 1 it means that there is cost savings and less than 1 means the project is now over budget. SPI should also be looked at as similar to the Variance case to see if this is really good news. If SPI is also above 1, it all really means good news.

The caveat here is, if the Cost Variance or Schedule Variance on the Positive side is too high (also CPI and SPI are high), it means that there were some mistakes during estimation. It clearly means that the estimates and plans were on the conservative side. If it is very badly on the negative side, it means the estimates and plans were very aggressive.

PV Formula for PMP Exam

Present Value:
Just thought of writing my understanding as a blog. Would be delighted if someone found this useful.

Present Value or PV is the value of the investment in today's terms. It is the value of future cash flows of the project in today's dollars.

This is a discounted cash flow technique and one of the Benefit Measurement Methods under the Project Selection Methods tool and technique which is used for creating a Project Charter.

Ouch, that was quite long. To repeat, the Project Charter creation process uses a tool and technique called Project Selection Methods. One of the techniques under the Project Selection Method is Discounted Cash Flow which calculates Present Value.

The formula for calculating a Present Value is

PV = FV/(1 + i)ⁿ

where
PV - Present Value to be calculated
FV - Expected Future Cash inflow
i - Notional Interest or Expected Rate of Interest

Net Present Value:
This is another interesting twist to calculate the Net future income/future cash inflow of the project in today's dollars. There is no big difference or additional concept to remember here. This is just a sum of all the expected Present values subtracted by the investment. For example, if we assume that the following are the given values.

Invested Amount : $5,00,000
Income Expected (Future Value)- 1 Year : $200000
Income Expected (Future Value)- 2 Year : $300000
Income Expected (Future Value)- 3 Year : $100000

Rate of Interest : 5% per annum

Now calculate the Present value for every year with the Present Value (PV) formula.

Year	Future Value	Calculation	PV
1	$200000	2,00,000/(1 + .05)	190476.2

2	$300000	3,00,000/(1 + .05)2	272108.84

3	$100000	3,00,000/(1 + .05)3	86383.76

Total NPV (For 3 years) = 5,48,968.8

NPV for the project = Total NPV (For 3 years) - Original Investment = 5,48,968.8 - $5,00,000

So the final NPV is 48,968.8.

And the formula for calculating the Net Present Value is,

NPV = PV₁ + PV₂+ PV₃ .. + PV_n - Invested Amount

According to the theory of NPV if the calculation of NPV yields a positive value or more than zero, then it is expected to make profit. It can get a go recommendation if all other factors look good. Additional points to remember are like,

• NPV assumes that the cash flows are re-invested at the cost of capital. ie, the same interest rate
• If NPV calculation is greater than zero accept the project. Otherwise reject the project
• Another note is that projects with high returns early in the project are preferred over the ones with lower returns early in the project.