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More important than learning the EV formulas is to understand them. As usual, let's begin with an example. We'll use the same simple example we used in the earlier post. The project involves constructing a boundary wall around a square piece of land. The planned cost for each side is $1000 and it's estimated to take one week to construct each side. Budget At Completion (BAC) is $4000 (= 4 x $1000). Let's say that at the end of week 1, we completed only 80% of the first side and spent $1200 on it.
Planned Value (PV) = $1000
Earned Value (EV) = 80% of $1000 = $800
Actual Cost (AC) = $1200
Schedule Performance Index (SPI) = EV / PV = $800 / $1000 = 0.8
Cost Performance Index (CPI) = EV / AC = $800 / $1200 = 0.66
As you can see, we have completed only $800 worth of work in one week and spent $1200 on it. Assuming that the current variances are typical, and are expected to continue for the rest of the project, to accomplish $4000 worth of work, it's going to take us 5 weeks and cost us $6000 ($1200 x 5). Therefore, our EAC is $6000.
Now, we'll calculate EAC using a formula. As per PMBOK Guide, Fourth Edition, the EAC formula for 'typical' variances is:
EAC = BAC / CPI ... (1)
=> EAC = $4000 / 0.66
=> EAC = $6000
Notice that the value of EAC is the same as we derived without the formula. Now let's have some fun with this equation. If we add and subtract EV in the numerator of the equation, we get:
EAC = (EV + BAC - EV) / CPI
=> EAC = EV / CPI + (BAC - EV) / CPI
We also know that CPI = EV / AC. Therefore, AC = EV / CPI. Let's substitute EV / CPI with AC in the EAC equation above.
EAC = AC + (BAC - EV) / CPI ... (2)
Hey, wait a minute. Isn't equation (2) the same as the one our keen reader pointed out? As it turns out, PMBOK Guide, Third Edition specified EAC = AC + (BAC - EV) / CPI for 'typical' variances. The fourth edition of the Guide, simplified the equation to EAC = BAC / CPI. Both equations - (1) and (2) - are the same. I've seen lot of confusion around the EAC formulas among PMP aspirants, in online forums too. I hope you find this information useful and pass it along to others who face similar doubts.
Do you have other doubts about Earned Value formulas? Feel free to post your questions.
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