# Oliver LEHMANN, question 2 (about Present Value)

I have been struggling for a while now with an exercise which requires the PV=FV/(1+r)^n formula.

Weblink is: http://www.oliverlehmann.com/pmp-self-test/75-free-questions.htm

Right answer is supposed to be D but I cannot figured out where comes from the 3%... I would greatly appreciate that someone show me step by step how to solve this exercise which has been torturing me for 2 days now

A company has to make a choice between two projects, because the available resources in money and kind are not sufficient to run both at the same time. Each project would take 9 months and would cost $250,000.

The first project is a process optimization which would result in a cost reduction of $120,000 per year. This benefit would be achieved immediately after the end of the project.

The second project would be the development of a new product which could produce the following net profits after the end of the project:

1. year: $ 15,000

2. year: $ 125,000

3. year: $ 220,000

Assumed is a discount rate of 5% per year. Looking at the present values of the benefits of these projects in the first 3 years, what is true?

A) Both projects are equally attractive.

B) The first project is more attractive by app. 7%.

C) The second project is more attractive by app. 5%.

D) The first project is more attractive by app. 3%.

AP

Thu, 03/07/2013 - 21:47

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## Formula is: PV =

Formula is: PV = FV/(1+r)^n

First Project

***********

PV for 1st year = 120000/(1+.05)^1 = 114285.71

PV for 2nd year = 120000/(1+.05)^2 = 108843.54

PV for 3rd year = 120000/(1+.05)^3 = 103662.75

PV for 1st project = 114285.71 + 108843.54 + 103662.75 =

326792Second Project

***********

PV for 1st year = 15000/(1+.05)^1 = 14285.71

PV for 2nd year = 125000/(1+.05)^2 = 113378.68

PV for 3rd year = 220000/(1+.05)^3 = 190048.38

PV for 2nd project = 14285.71 + 113378.68 + 190048.38 =

317712.77To find which is attractive

********************

= (326792-317712.77)/317712.77 = 9079.23/317712.77

=

0.0286To find %

*********

0.0286 * 100 =

2.86% = app. 3%Hence answer is D) The first project is more attractive by app. 3%.

Shirshendu

Fri, 03/08/2013 - 14:41

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## Thank you AP

Thank You AP ,

Let me know if we are bothering you too much , but can you explain how Mr . Oliver lehmann got the 2nd answer.

Thanks in advance.

Assuming ±3 sigma precision level for each estimate, what is the standard deviation of the allover path?

amar

Fri, 03/08/2013 - 17:01

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## Do they allow calculators in exam ?

It wuld be impossible to get to this result without a calculator, do they allow ? Also, will there be questions of this complexity in th exam ?

Thanks.. this forum is really helpful.

AP

Fri, 03/08/2013 - 17:07

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## Dear Amar, Calculators will

Dear Amar,

Calculators will be in-built in the system. These problems are not at all complex. It may look complex because of the way I have explaned in detail.

If you know the formulae to be applied and if you practice well, then you can easily crack these type of questions under 1 minute.

Regards,

Arun.

amar

Tue, 03/12/2013 - 00:41

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## Thanks AP !!Sounds like only

Thanks AP !!

Sounds like only the smartest person would be a PMP

abourneuf

Mon, 03/11/2013 - 13:37

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## Thank you so much!

Thank you so much! I understand now why I could not get the 3% of difference between A and B... I actually wrongly used the PV = FV/(1+r)^n formula because I used the "n" variable with 3 as period value for Year1, 2 and 3...

AP

Fri, 03/08/2013 - 15:11

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## Always happy to help

SD for allover path = Square root of (allover Variance)

Variance for allover path = Sum of (square of SD) of individual activities

Calculate SD

************

SD = (P-O)/6

Act. A = (24-12)/6 =

2

Act. B = (14-8)/6 =1

Act. C = (27-15)/6 =2

Act. D = (28-10)/6 =3

Act. E = (35-17)/6 =3variance = Sum of square of all SDs

= 4+1+4+9+9 =

27Now, SD for all over path = Square root of allover Varaince

= square root of 27 =

5.196=

App. 5.2 daysShirshendu

Fri, 03/08/2013 - 15:20

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## Thanks AP

Thanks AP , a good lesson learnt.

Much appreciated , thanks again.

pmalik

Sun, 03/18/2018 - 07:41

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## Scores

The answer & explanations are on Oliver's site. For 1st & 2nd time scores, you can check https://www.pmbypm.com/oliver-lehmann-pmp-questions/