Financial Management for Project Managers Risk Management 3 — Questions and Answers
Question 1: A project manager is reviewing a risk that has a 20% chance of increasing costs by $100,000 and a 10% chance of saving $40,000. What is the net EMV of these two risk events?
- $16,000 threat (Correct answer)
- $20,000 threat
- $16,000 opportunity
- $24,000 threat
Correct answer: $16,000 threat
Threat EMV = 0.20 × $100,000 = $20,000; Opportunity EMV = 0.10 × $40,000 = $4,000; Net = $20,000 − $4,000 = $16,000 net threat.
Question 2: What is the primary purpose of a risk breakdown structure (RBS) in financial risk management?
- To assign dollar values to each identified risk
- To categorize risks hierarchically by source to aid identification and analysis (Correct answer)
- To rank risks from highest to lowest EMV
- To document the history of realized risks on past projects
Correct answer: To categorize risks hierarchically by source to aid identification and analysis
An RBS organizes risks by category (e.g., technical, external, financial) to ensure comprehensive identification.
Question 3: A project's sensitivity analysis shows that labor cost overruns have the greatest effect on total project cost. This result is most usefully displayed using a:
- Probability-impact matrix
- Tornado diagram (Correct answer)
- Decision tree
- S-curve
Correct answer: Tornado diagram
A tornado diagram ranks variables by their sensitivity impact on the output, showing the widest bars for the most influential factors.
Question 4: Which contract type places the greatest financial risk on the buyer (project owner)?
- Firm fixed price (FFP)
- Fixed price incentive fee (FPIF)
- Cost plus fixed fee (CPFF) (Correct answer)
- Time and material (T&M) with a ceiling
Correct answer: Cost plus fixed fee (CPFF)
Under CPFF, the buyer reimburses all allowable costs plus a fixed fee, so cost overruns are borne entirely by the buyer.
Question 5: When project management reserves are used for unknown-unknown risks, who typically has authority to approve their release?
- The risk owner
- The project manager
- Senior management or the sponsor (Correct answer)
- The project control board member
Correct answer: Senior management or the sponsor
Management reserves for unknown risks are controlled above the project manager level, requiring senior management or sponsor approval.
Question 6: A project manager discovers that a vendor's financial instability creates a risk of contract default. The BEST initial response is to:
- Immediately terminate the contract
- Conduct a qualitative risk assessment and add the risk to the risk register (Correct answer)
- Accept the risk and do nothing until default occurs
- Transfer all project deliverables to another vendor immediately
Correct answer: Conduct a qualitative risk assessment and add the risk to the risk register
The first step is to formally assess and document the risk before deciding on a response strategy.
Question 7: In decision tree analysis, the 'decision node' (square) represents:
- An uncertain event with multiple possible outcomes
- A choice the project team must make among alternatives (Correct answer)
- The final monetary payoff of a scenario
- A risk that has already been realized
Correct answer: A choice the project team must make among alternatives
Square nodes in a decision tree represent decision points where the team selects among available options.
Financial Management for Project Managers Risk Management 3
A project manager is reviewing a risk that has a 20% chance of increasing costs by $100,000 and a 10% chance of saving $40,000.
What is the net EMV of these two risk events?