PMP Math Prep - PMP Math and Formulas

Hi, I'm Joseph Phillips. I'm the author of several books on project management, and I'm the instructor for this course on PMP math. Are you a math person? I am not. Growing up, I hated math. I would pretend to be sick in class. I would skip class. I would try to copy somebody's homework. I just did not get math.

Well, when it came to project management, I very quickly learned you have to know how to do math, and so I made myself really study and immerse in math, and for your PMP exam, it's no different. You have to know how to do some math in order to pass the test.

In this lecture I'll walk through the Microsoft Excel Worksheet that you can use throughout this course.

Now we're getting into chapter four of the PMBOK guide, which is all about project integration management. When we think about project integration management, we're thinking about how all of the different processes work together. We actually start with our first process, which is to create the project charter.

Present value is where we examine what a future amount of funds are worth today. As a project manager, you might want to pitch the idea of a project, or you have to choose from several different projects and which one's the best. You may have to do that on your exam.

So present value would be, “This project is worth X amount of dollars in the future, how do I know how much that's worth today so I know what's the maximum amount we should invest in?”

In the last lecture we talked about present value, which is taking a future amount of funds and finding out what it's worth today, so we're taking a future amount into present dollars. Recall that we divided, we reduced it. Well, in this lecture we're going to talk about future value, what's amount of money today worth 3, 4, 5, 20 years in the future? So it's a very similar approach, instead of dividing, where we're reducing to bring it closer, we are multiplying because we are multiplying it out. That's a little way you can remember present value or future value.

Now, we're going to talk about net present value. Present value is kind of a tough formula to really put much confidence in. The reason why is we're saying, "We don't get any return on investment until the very end of the project." Well, we know if we're developing a piece of software or you have a project with multiple deliverables, there's value in those deliverables.

So for example, imagine that you have retail stores all over the world, and you're going to upgrade each store. You're going to remodel every store. So as soon as you remodel that first store, you get a return on investments. Sales are going to improve is what you hope. So you don't have to wait till all the stores are remodeled before you allow people to come in and buy things. But each year or quarter or what have you, you're going to have X amount of stores that are bringing in income based on your remodel. So when I have a project with multiple years, and I'm getting a return each year, we want to look at the net present value, rather than waiting until all the way till the end.

Now let's talk about the internal rate of return. And I have some really good news for you about this math. You won't have to do it on your exam. You're going to need to recognize the components of the internal rate of return, why you use it, but there's no math that you have to do. It's a pretty complicated formula. And usually we use a piece of software like Excel to calculate the internal rate of return.

Now let's talk about Opportunity Cost. Opportunity cost is where you have two mutually exclusive decisions and you can only choose one. Would you like to go to the movies with your friends, or would you like to go to a concert with a different group of friends? So you say, "Well I want to go to the concert." So you're going to go to this concert and forego the movies. The Opportunity Cost is what you give up, the movies.

                                All right, so let's put that into dollars. Opportunity Cost is the value of a choice. Which project are you going to do? Project A or Project B? You have to choose one thing over another and that shows the value in the thing that you choose. What you gave up is the value. It's the value of the opportunity lost, if you will.

Just a couple of quick concepts in this lecture. Let's begin by talking about the payback period. If you have to borrow $100,000 to invest in your project, and this project is going to earn you $5,000 a month every month once you're done, how long will it take to pay back to $100,000? It will take 20 months; $5,000 a month into $100,000, that's 20 months. Some might argue it's going to take a little longer than that because you have an interest on that $100,000 you borrow. That's payback period. It's some pretty quick math here that we're looking at. It really doesn't consider the time value of money. It's just how long to recover your investment.

All right. You did it. Great job. You reached the end of this section on project integration management and the math that you may see in this chapter on your exam.

We talked about the present value, what's a future amount of funds worth today. We looked at the formula on how we take the future value divided by 1.06, if it's 6% interest rate, 1 plus I to the power of N. You can see I'm in love with .06. 1 plus I to the power of N.

We looked at the future value, what's a present amount of funds multiplied out to the future. That would be our ... To find our future value, present value times 1 plus I to the power of N, where I is the interest and the N is the number of time periods.

we talked about net present value, where we find the present value for each year that we have a return, we sum those up, and then we subtract our original investment, and that's our ENPV, our net present value.

looked at the internal rate of return and the hurdle rate. Then we talked about a couple of other terms dealing with our return on investment.

right. Great job. Those are the key things from Chapter Four on math from the PMBOK Guide, Sixth Edition. Have confidence you can do this. I'll see you in the next section.

Out of all the project management classes that I've taught, the number one question that I get comes from this section where we're going to talk about the math in chapter six of the PMBOK, which is project schedule management. I get a ton of questions about Float and that's one of the things, the primary thing that we're going to cover in this section. Yes, you will have some questions on Float on your PMP exam, so you'll need to know how to do this little puzzle. I say puzzle because that's how I look at it. Rather than just saying it's math, think of it as a puzzle that you have to work out. Now, some good advice for you. First off, when you get one of these questions about finding Float, draw it out on your scratch sheet of paper and be very neat and precise on how you draw out the Float diagram, or the project network diagram, because you may have more than one question with the same network diagram. In addition, take your time and check your math. That's one of the great things about Float. You'll know if your answer is correct or not based on the end result. I'm going to show you how to do that. It's very easy. All right, so let's hop in here to this section, which correlates to chapter six in the PMBOK guide on project schedule management. See you in the next lecture.

Let's begin our conversation by talking about analogous estimating. Analogous estimating is like creating an analogy between two projects. It's not a very reliable estimate type, because it's kind of a guess. You're basing your current estimate on mast information, on historical information. So for example, we have these two different homes here, the landscaping let's say in these two different homes. And project A took 180 days to do all of the landscaping, a really big landscaping project. Well, project B is about 10% larger, so we're going to say it's going to take 198 days. We don't have a lot of information, this is a really quick, subjective way to do an analogous estimate. It's just real quick. With an analogous estimate, you're creating an analogy between the two.

Parametric estimating is where we use a parameter to predict the duration of an activity.

So for example, we have this light fixture that we want to install and based on our installation, based on our tests, we know it takes about two hours to install that unit, to go through the whole process of unpacking it and assembling it and actually installing it. And we have 10,000 of those units to install. So 10,000 units times two hours, that's 20,000 hours that we're predicting.

Bottom-up estimating means that we start at zero, and we predict the time for every activity in our activity list. Bottom-up estimating is the most reliable approach, but it takes the longest to do because we need a work breakdown structure, because from the WBS we get our activities list.

Now, let's talk about three-point estimates. In this lecture we will have some math. A three-point estimate is just an average. So, a three-point estimate requires us to have an optimistic estimate for an activity, a most likely estimate, and a pessimistic estimate. And then we average those estimates and that becomes our estimate, our three-point estimate for that activity. So, this takes a little bit of time to do.

The really important stuff that I know you couldn't wait for that you want to come in and talk about, float. Float is just a way of saying how long can I delay an activity without affecting the start date of the next activity or the end date of the project. There are three types of float.

First off, we have free float. That's an activity can be delayed without affecting the early start of a successor activity. Basically, how long can I delay this activity without affecting the next activity's start date. Then, we have total float. Total float means an activity can be delayed without delaying project completion. How long can I delay this activity and it won't mess up the in date for the project. Most of the time we're worried about free float. Project float's unusual, it's really easy. Project float means you can delay an activity without missing your deadline for the project. For example, you have a very low priority projects that's going the last 60 days and you have a year to get it done. You've got a big window that you can pick up and put down that project at your discretion as long as you don't miss your deadline of one year.

There are a few agile questions you'll need to know for the PMP, maybe one or two. They're not really tricky but I would be familiar with an iteration Burndown Chart, and without getting into all the back story of what's an iteration and what's a Burndown or what are we burning down, just know this is a Burndown Chart what you see here. What we're looking at, each bar represents how much work is left and what we call the iteration backlog. You can also do this for the whole project, so you might just see it called a Burndown Chart.

Great job finishing this section, a really big important section when it comes to math in project schedule management. We talked all about Float. We looked at analogous estimating, parametric estimating. We looked at three point and beta estimates, a little bit of math there, and then we talked about bottom-up estimating. Know those terms for your exam. Guarantee you you're going to see those concepts. Then we really dove in and we did Float. We looked at a simple approach to Float with our forward pass and a backward pass, and then you completed an assignment where you dug in and calculated flow. Finally, we wrapped up talking about burn down charts and velocity, so a lot of terms, a lot of information in this section. Know that business for your exam and you'll be in good shape. Great job. Keep moving forward.

Welcome back. How you doing? Hanging in there with this MASS stuff, knocking it out. I know we've talk about a lot of concepts so far, but now we're gonna move into even more concepts. So we're going into chapter seven in the PMBOK Guide Sixth Edition, which is all about cost management. So in this chapter, there are a lot of formulas, because we're really focusing on earned value management.

So let's hit these estimate types, which you've already seen for scheduling. But we're going to look at these in the context of cost. So we're not going to linger here, pretty easy stuff. An analogous estimate, recall it's an analogy between two projects. So we have this painting these houses for instance. We create an analogy. It's not real reliable. Project A was $560,000. Project B is about 10% larger, $616,000. So it's an analogy. It's similar type of work, like painting these two houses. And we have to have some historical information. Parametric estimating, we looked at earlier with time. Now we're looking at in the aspect of finances.

Okay, this is the lecture that a lot of people have questions on when I teach the PMP boot camp, and that's on earned value management.

A lot of formulas in EVM, earned value management. Also you might see this as earned value analysis.

Let's hop in here, and we'll look at our earned value management. We're going to walk through all these different formulas you should know for your exam.

All right. You are making great progress here as you prepare to pass your exam. I know there's a  lot of formulas, and again, I was not a math guy. So, I have to really slow down and take my time, and I had to memorize those formulas. I want you to do the same thing. If you're struggling with these formulas get some flashcards. Write out the formulas over and over and over.

Hi welcome to this section. Welcome to Chapter 10 of the PMBOK guide on project communications management. Now this one sneaks up on people. How can there be math in communications. I talk to Bob. Bob talks to Sally. What more is there? Well there's a really important formula that you need to know when it comes to your PMP exam and that's the communications formula.

That's really the only thing we're looking at in this section. But I wanted to just take this opportunity to talk about communications management for a moment. Communications management, really important for your exam. It's tightly related to stakeholder management because who are your community with? Your stakeholders.

Let's get to it and talk about the communications channel formula. This is really easy stuff, but easy, of course, doesn't mean that you shouldn't learn it and know it and be able to do it in multiple ways. Let me show what I mean by that. The communications formula is N times N minus one divided by two where N represents the number of stakeholders. Okay, so let's see this in action.

Welcome back to Project Risk Management. I have a very simple risk management question for you. Do you ever go play the lottery? Not really good odds, right, that you're gonna win the lottery. I did this for you; I went and bought this lottery ticket, and funny enough I hit three out of the six numbers. So that means I got half the numbers, I win 50%, right? Of course not. I think I get five dollars for this lottery ticket. So not a great investment, don't have much confidence that it's gonna happen.

Let's talk about qualitative analysis. Qualitative analysis, we're looking for just a quick subjective review. It's not very reliable. It's a real fast review of the probability and the impact of our identified risk events. So it's pretty

When we do qualitative analysis, what we're doing is we are qualifying the risk to go on to quantitative analysis. So qualitative is real shallow and quick, is this a serious risk or not? That allows it to be promoted onto quantitative.

Now let's talk about quantitative risk analysis. This is the more serious of the two. We're looking at larger, more serious risk events. We're looking at risk events that have gone through qualitative or when you've initially identified the risks, you can see it so serious, it should go on to quantitative immediately.

Quantitative means you are quantifying the risk. You're trying to see what's a true probability and a true impact. It often takes time and you might even have a budget to do some testing to see the true probability and impact. So quantitative, we're looking to quantify.

In this lecture, we're going to look at decision tree analysis. Decision tree analysis is a pretty simple approach where you're just mapping out possible outcomes of related choices. So we're going to look at a decision tree. We begin by the decision. We have a single node that's going to branch out into possible outcomes.

You reached the end of this section on Project Risk Management. There's a lot of math that we looked at in this section. We talked about our qualitative risk analysis with probability times impact using an ordinal scale, and then we know the outcome of qualitative. It promotes those risks to go on to quantitative. It qualifies. Quantitative is more serious.