PGM Financial Management 2 — Questions and Answers
Question 1: A program manager is evaluating two initiatives. Initiative A has an NPV of $500,000 and Initiative B has an NPV of $750,000. All else being equal, which should be prioritized and why?
- Initiative A, because lower NPV indicates lower risk
- Initiative B, because higher NPV indicates greater expected value creation (Correct answer)
- Initiative A, because it will likely cost less to implement
- Neither, because NPV alone is insufficient for decision-making in programs
Correct answer: Initiative B, because higher NPV indicates greater expected value creation
Net Present Value (NPV) measures the expected value creation after discounting future cash flows; a higher NPV indicates greater financial benefit to the organization.
Question 2: What does the term 'management reserve' refer to in program financial management?
- Funds withheld by the CFO for corporate emergencies
- Budget set aside for known risks identified in the risk register
- An amount added to the cost baseline to handle unknown unknowns (Correct answer)
- The contingency fund allocated to individual project managers
Correct answer: An amount added to the cost baseline to handle unknown unknowns
Management reserve is budget allocated to cover unforeseen work within scope — unknown unknowns — and is typically controlled by senior management or the program sponsor.
Question 3: Which financial analysis technique calculates the time required for a program investment to generate enough returns to recover the initial investment cost?
- Return on Investment (ROI)
- Net Present Value (NPV)
- Payback Period (Correct answer)
- Internal Rate of Return (IRR)
Correct answer: Payback Period
Payback Period measures how long it takes for cumulative program benefits to equal the initial investment, helping stakeholders understand when financial break-even occurs.
Question 4: A program manager discovers a $200,000 cost variance at the end of Q2. What is the MOST appropriate first step?
- Immediately escalate to the executive sponsor for additional funding
- Analyze the root cause of the variance before deciding on corrective action (Correct answer)
- Issue a change request to increase the budget baseline
- Reduce the scope of lower-priority program components
Correct answer: Analyze the root cause of the variance before deciding on corrective action
Understanding the root cause of the variance is essential before taking corrective action, as the appropriate response depends on whether the variance is due to inefficiency, scope growth, or other factors.
Question 5: In program financial management, what is the key difference between a contingency reserve and a management reserve?
- Contingency reserve is for known risks; management reserve is for unknown risks (Correct answer)
- Management reserve is for known risks; contingency reserve is for unknown risks
- Contingency reserve requires board approval; management reserve does not
- There is no practical difference — both terms are interchangeable
Correct answer: Contingency reserve is for known risks; management reserve is for unknown risks
Contingency reserve is planned for identified risks (known unknowns) and is included in the cost baseline, while management reserve addresses unplanned risks (unknown unknowns) and is held outside the baseline.
Question 6: Which financial document provides a time-phased representation of the approved program budget, used as the baseline against which actual expenditures are measured?
- Program business case
- Cost performance baseline (Correct answer)
- Budget forecast report
- Funding requirements schedule
Correct answer: Cost performance baseline
The cost performance baseline is the time-phased approved budget used to measure, monitor, and control overall cost performance throughout the program.
Question 7: A program manager is reporting financial status to the governance board and the program's SPI is 0.92 and CPI is 1.05. What does this combination indicate?
- The program is behind schedule and over budget
- The program is ahead of schedule and under budget
- The program is behind schedule but under budget (Correct answer)
- The program is ahead of schedule but over budget
Correct answer: The program is behind schedule but under budget
SPI < 1.0 indicates the program is behind schedule, while CPI > 1.0 indicates the program is getting more value per dollar spent (under budget), suggesting efficient but slower execution.
PGM Financial Management 2
A program manager is evaluating two initiatives.
Initiative A has an NPV of $500,000 and Initiative B has an NPV of $750,000.
All else being equal, which should be prioritized and why?