The PMP exam is essential for anyone seeking a career in project management. It determines whether or not you have the competence and expertise required to be an efficient project management professional. The PMP is not an overly complex exam. However, it can get a bit tricky at times with all the formulas you have to remember. There are around 40 formulas that individuals should know and comprehend before giving the PMP test. Sound intimidating, doesn’t it?
The good news is that you don’t have to study (extensively) and remember all forty of them to clear the exam. Just a quick look at most of them will suffice. However, there are five formulas (given below) that you need to understand completely before taking the PMP exam.
Return on Investment
The first formula is for calculating the return on investment (ROI). The formula is used to determine the amount of money accumulated or lost with relation to the actual investment. That is why it is commonly referred to as the ‘profit and loss formula’. The ROI facilitates the project manager figure out which project serves as the best investment. For instance, if the first project has an ROI of 25%, the second project’s ROI is 30% and the ROI of the third one is 35%, in this case the third project is the best investment because its ROI is the highest, all other factors remaining constant.
Internal Rate of Return
The next one is the internal rate of return (IRR). The formula primarily serves as a capital project budgeting metric to assess whether an investment is worth making. Furthermore, it compares the current value of the cash flow to the original investment which then gives the IRR value. To put it into perspective, imagine a project manager has to compare a couple of different projects and decide which one is best for his company he can do so using IRR. Upon calculating the IRR of those projects, i.e. 20% for project 1 and 25% for project 2, he concludes that the second project is a better option.
Cost Performance Index
Another fundamental formula that you need to study is the cost performance index (CPI). The CPI is determined by dividing the original cost with the earned value. As the name implies, the CPI assesses the cost performance of a particular project, i.e. whether the budget has been used as planned.
Net Present Value
The net present value (NPV) is used to evaluate the success of a particular investment. In short, it serves as a capital project financial metric. Moreover, it takes into account the current inflow and outflow of cash. So a project manager can judge the profitability of a particular project by looking at its NPV.
This formula is extremely important as it is used for evaluating the schedule performance of a particular project. In addition, it takes into account whether or not the project in on track with the schedule. It is derived by subtracting the earned value from the planned value of the given project.
These are five important formulas you should study before appearing for the PMP exam.