PgMP Formulas - All of the Math You Need to Ace Your Exam!

Hey guys, and welcome back to my channel. And in this video, I am going to cover all of the formula or math that you need to know for your upcoming PGMP exam. This is the program management exam from PMI, and you need to know very little math for the exam, but there is some math components on your exam, and I'm going to cover it here, starting with the first one, which is return on investment. So return on investment, or ROI, is used to build the business case for whether or not it makes sense to start your program So generally, this is done at the start of the program, and the company will pick the program or project that will give them the highest ROI. The way that you calculate the ROI is that it's going to be a percentage, and the way that you calculate this percentage is you use the financial benefits received from executing this project or program minus the cost divided by the cost, and then multiply everything by 100 in order to turn it into a percentage. The next formula that we will look at is payback period or break-even point, although you don't need to calculate this because it is quite complicated to calculate this and it is not a CFA exam after all. But you do need to know what the payback period means. So the payback period refers to the number of years it takes to recover the initial investment that went into the program. So for example, if your program increases revenue you buy $1 million and it cost $3 million to execute the program, the payback period here will be 3 years because it takes 3 years to recover the initial investment. Our next formula is a present value. So present value is the discounted cost of money in today's dollar because the thing they need to know is a dollar tomorrow is worth than a dollar today due to inflation. So essentially we want to discount all of the future cash flow into the rate today in order to see what kind of present value we can get from the project today. This is another formula used to prioritize program and project. So essentially what we're going to do is say, let's say that we need to invest, you know, $1,000 into this project, but it's going to give us $100 every single month in a year from now. We want to discount that that $100 that we're going to get in the future back into the present value to see if it makes sense for us to invest into this project or not. The formula to do this is FV, which is future value, divided by 1 plus r, and r is the discount rate. So this is the rate of return that you are aiming for in your project, to the power of n. And N is the number of years. Another term for discount rate is also interest rate. Now, from the present value, we are able to calculate the net present value, and the net present value is today's value of expected cash flows. This is all the expected revenues minus today's value of invested cash. So this is all of the cost related to your program. Essentially, what we're doing here is we are projecting how much money we're going to earn in the future versus when cost for the program will be incurred, and we will discount everything into today's dollar. Now, if the NPV is positive, that means our program is going to earn us money. If it's negative, that means our project is going to lose us money. We will give priority to those projects that will give higher NPV. NPV is more absolute while PV is calculated based on assumed project rate of interest and the number of years that it's going to project into the future. IRR, or internal rate of return. So the IRR is a metric used in capital budgeting to estimate the profitability of potential investment. So in order to calculate the IRR, we will set the NPV equal to 0 and solve it for the r, or the discount rate. Now you can do this through trial and error, but there are software programs that will calculate the IRR for you. Essentially, you want to pick a project with higher IRR. We will do this calculation at the beginning of the program when we are evaluating the business case and seeing which program makes more sense for our organization to take on. Now, for all of these terms, you just need to know the definition, as it is not a financial exam. You do need to know how they work and when to use them, though. Our next formula is the EMV, or expected monetary value, and the way that you calculate this is to use the probability of something happening times the impact. This is usually used in risk management. What is the probability of this risk happening? And if this risk does happen, what will be the impact of this risk? So for example, if there's a 50% chance of a risk occurring, and if it does occur, it will cost $10,000 in damages, the EMV would be $5,000. Now you will use the EMV to help you prioritize risk and only focus on the ones that will have the biggest impact on your project. The next formula we have is PERT, and PERT will help you estimate your schedule and your cost. So what it does is that it will come up with 3 estimates: a pessimistic estimate, a most likely estimate, as well as an optimistic estimate for your activity duration or your activity cost. So this formula can be used for both schedule as well as cost, and then you would come up with 3 different estimates for either your activity duration or your cost, a pessimistic number, most likely number, as well as an optimistic number. Then you would push all of those numbers into this equation, which is pessimistic plus 4 times most likely plus optimistic divided by 6. For example, if we are doing duration and our pessimistic is 3 weeks, and then we would add 4 times, let's say the most likely is 5 weeks, so we would 4 times 5, then the optimistic is 7 weeks, so we would do 3 plus 4 times 5 plus 7 and divide everything by 6 to come up with an estimation for how long that activity will take. Our next formula is communication channels, and the way we calculate the number of communication channels is N times N minus 1 divided by 2. Where n equals the number of stakeholders. Let's say that there are 5 people on our project team. We would do 5 times 4 because that's n minus 1, and then divide it by 2. So 5 times 4 is 20, divided by 2 is 10. So if we have 5 people on our project team, there will be 10 possible communication channels. And the last formula you'll need to know is Earned Value Management, or EVM. EVM concepts may help program managers monitor the component projects and assess their progress. What it does here is that it will assess whether or not you are behind schedule, ahead of schedule, behind budget, or you are ahead of budget, which means that you are spending a lot more money than what you have budgeted for, and what to do about it. So EVM is a series of formula to help you assess the health of your project, and it mainly focuses on schedule as well as cost. I have a separate video which I'll link below just on EVM formulas as well. So there you have it. This is all of the formulas you will need to know for your upcoming PGMP exam. There's not a lot of math on this exam, so you do not need to be worried. Most of it is just definitions that you need to know because it is not a financial exam. And I wish you all the best on your upcoming exam. Thank you so much for joining me for this video. Make sure you subscribe and hit the notification bell, and I will see you soon.