Not in the PMBOK but on the Examination

There are questions on cost on the PMI examination that are not included in the PMBOK. There are not very many of them, and you only have to know one or two of the formulas for the following. For the most part, you simply have to know what they mean. Remember that you are not sitting for a CPA examination but for a PMP certification. You do not have to be an accountant to pass this examination; far from it. Here are some of the terms to know. If you want more information, Harold Kerzner's sections on cost in his book Project Management: A Systems Approach to Planning, Controlling, and Scheduling are excellent. You can also Google the words you see here for much more information.

Present Value(PV): The current value of a given future cash flow stream, discounted at a given rate. This formula is one you should know to calculate a present value.

FV = Future value, which is divided by 1 plus the interest rate (r) multiplied by the number of time periods (n).

The examples on the exam almost always use .10 as the interest rate. An example would be to find what the value of $6000 received three years from now would be today. To do that, you apply the formula, 6,000 (1 + .1)3 equals 6,000/1.331, which equals $4,507. So $4,507 today would equal $6,000 three years from now.

Internal rate of return (IRR): A method that determines the discount rate at which the present value of future cash flows will exactly equal investment outlay. Before you go any further, know that a formula for this is not on the exam. In order to do an IRR, you need a computer program. The better the IRR, the more likely the project will be chosen if the only criterion is return. An example where this may not be true is where the government requires a new accounting system to be in place by a certain date. The value of the project will not be determined by figuring the return that will be made on cost because the project must be done in order to comply with the law.

Payback period: The amount of time it takes to recover the expenditure for the project before you begin to actually generate revenue.

Opportunity cost: When you make the choice of one project over another, you can look at opportunity cost. "This is the cost of doing one project instead of another which ties up capital and usually means that the organizational management feels that the project chosen gives a better chance of return." RKM

Sunk costs: Money that has been spent on the project that will never be recovered. It is a good idea to know that sunk costs are not recoverable so that when someone says to you, "Can you recover the costs already expended on this project?" you can look at them and say, "No." Sunk costs are gone, never to be recovered.

Depreciation: There are two types of depreciation: straight line and accelerated. Straight line means you take the same amount of depreciation each year. Accelerated depreciation means that variable amounts of depreciation are taken each year, and at the beginning of the depreciation, you take more than at the end. This would be especially useful if you were depreciating computers, which often obsolesce much faster than other pieces of equipment.

You can go from straight line depreciation to accelerated depreciation in your books, but you cannot go in reverse. You are not allowed to start depreciating something using accelerated depreciation the first year and then go to straight line for following years.

As you have probably figured out by now, most of these formulas are useful primarily to an accountant. On the exam, you may be asked one or two questions about these accounting terms, but you certainly do not have to use the formulas or even know what the formulas are.

Q.	________ are costs that are not recoverable.
		A.	Capital costs
		B.	Real costs
		C.	Sunk costs
		D.	Overhead costs

The answer is C. You cannot recover sunk costs, as much as many organizations would like to do so.

Q.	The amount of time it takes to recover the expenditure for the project before you begin to actually generate revenue is known as the ________.
		A.	Return on investment
		B.	Payback period
		C.	Selection period
		D.	Return period

The answer is B. Some projects are chosen because the payback period is shorter than on other projects being considered.

Q.	You can go from ________ to accelerated depreciation from one year to the following year but not the reverse.
		A.	Straight line depreciation
		B.	Capital expenditure methodology
		C.	Direct cost capitalization
		D.	Intermediate depreciation

The answer is A. You can switch from straight line depreciation as your means of accounting to accelerated depreciation the next year, but you cannot do the reverse.