Project Management and Engineering Economics
This domain tests cost and schedule control on engineering work: network scheduling, earned-value interpretation, and investment appraisal that respects the time value of money.
Core rules
- WBS decomposes scope into controllable work packages; the critical path is the longest duration path and carries zero total float (float = LS − ES).
- Earned value: CV = EV − AC; SV = EV − PV; CPI = EV/AC; SPI = EV/PV; EAC = BAC/CPI when the current cost trend continues.
- Economics: NPV = Σ CF_t/(1+i)^t; IRR is the rate where NPV = 0; simple payback ignores discounting and is a liquidity screen, not a profitability measure. For mutually exclusive options, rank by incremental IRR or by NPV at the required rate, never by IRR alone.
- Depreciation and tax affect cash flow, not profit presentation; use after-tax cash flows for appraisal.
Worked example
BAC = 500 000 at month 6: PV = 200 000, EV = 180 000, AC = 210 000. CV = 180 000 − 210 000 = −30 000 (over budget). SV = 180 000 − 200 000 = −20 000 (behind schedule). CPI = 180 000/210 000 = 0.857; SPI = 180 000/200 000 = 0.90. EAC = 500 000/0.857 ≈ 583 000, so forecast an overrun near 83 000 unless the cost trend changes. Both indices below 1.0 means the project is late and overspending - recovery must address productivity, not just add resources.
Traps
Dividing by PV instead of AC for CPI; quoting SPI on a project near completion where earned value saturates; calling payback a profitability measure; comparing IRRs of projects with different scale; assuming float on a non-critical path is free time that never expires.