PSI - Exams Project and Financial Management Questions and Answers — Questions and Answers
Question 1: A project has a budget at completion (BAC) of $150,000. At the current time, the earned value (EV) is $75,000, the planned value (PV) is $80,000, and the actual cost (AC) is $90,000. What is the Cost Performance Index (CPI) for this project?
- 1.20
- 0.94
- 0.83 (Correct answer)
- 1.07
Correct answer: 0.83
The Cost Performance Index (CPI) is calculated using the formula: CPI = Earned Value (EV) / Actual Cost (AC). In this scenario, EV = $75,000 and AC = $90,000. Therefore, CPI = $75,000 / $90,000 = 0.83. A CPI less than 1 indicates that the project is over budget.
Question 2: A project manager is developing the budget and needs to account for potential risks that could impact costs. Which of the following is the BEST tool for allocating funds to cover these unforeseen events?
- Management Reserve
- Contingency Reserve (Correct answer)
- Parametric Estimating
- Bottom-Up Estimating
Correct answer: Contingency Reserve
A Contingency Reserve is a specific budget allocation set aside for identified risks ('known unknowns') that might occur. This is part of the cost baseline. Management Reserve, on the other hand, is for 'unknown unknowns' and is not part of the cost baseline.
Question 3: During the execution phase of a construction project, the project manager notices that the cost of raw materials has unexpectedly increased by 15%, leading to a significant budget deviation. Which of the following processes is the project manager actively engaged in?
- Cost Budgeting
- Cost Estimating
- Determine Budget
- Control Costs (Correct answer)
Correct answer: Control Costs
The Control Costs process involves monitoring the project's status to update the project costs and managing changes to the cost baseline. This scenario describes monitoring actual performance against the baseline and identifying a variance, which is a core activity of cost control.
Question 4: Which of the following financial metrics is used to determine the efficiency of a project's schedule performance by comparing the value of work completed to the value of work planned?
- Cost Variance (CV)
- Schedule Performance Index (SPI) (Correct answer)
- Return on Investment (ROI)
- Cost Performance Index (CPI)
Correct answer: Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) measures how efficiently the project team is using its time. The formula is SPI = Earned Value (EV) / Planned Value (PV). An SPI greater than 1 indicates the project is ahead of schedule, while an SPI less than 1 means it is behind schedule.
Question 5: A project's initial budget (BAC) is $500,000. The project is currently performing with a Cost Performance Index (CPI) of 0.95. Assuming the current cost performance will continue for the remainder of the project, what is the most likely Estimate at Completion (EAC)?
- $475,000
- $500,000
- $526,316 (Correct answer)
- $550,000
Correct answer: $526,316
When it's assumed that the current cost performance will continue, the formula for Estimate at Completion (EAC) is BAC / CPI. In this case, EAC = $500,000 / 0.95 = $526,315.79, which rounds to $526,316. This formula provides a forecast of the total project cost based on its performance to date.
Question 6: In project financial management, what is the primary purpose of conducting a variance analysis?
- To secure initial project funding from stakeholders.
- To calculate the final return on investment (ROI) at project closure.
- To determine the root cause of deviations from the cost baseline and inform corrective actions. (Correct answer)
- To select the most qualified vendors through a competitive bidding process.
Correct answer: To determine the root cause of deviations from the cost baseline and inform corrective actions.
Variance analysis is the practice of comparing planned or baseline figures (like the cost baseline) with the actual results to identify differences or variances. The primary goal is to understand why a variance has occurred and to determine if corrective or preventive actions are needed to bring the project back on track.
PSI - Exams Project and Financial Management Questions and Answers
A project has a budget at completion (BAC) of $150,000.
At the current time, the earned value (EV) is $75,000, the planned value (PV) is $80,000, and the actual cost (AC) is $90,000.
What is the Cost Performance Index (CPI) for this project?