Question

Suppose your job is to estimate the costs of a proposed project. (Please just assume someone else will estimate the benefits and their distribution.) The project has some risks so its exact costs are unknown, but we expect there is a 50% chance it will cost $100 million and a 50% chance it will cost $500 million. If the project’s costs will be spread over 327 million people what will you use as an estimate of the costs? Briefly explain.

Answer 1

Since the projects involves certain risks by which cost of the project is not ascertainable and their chances along with the chances that the amount may incurr, we can use probablity method to estimate the cost of the project considering which project probablity is higher.

Project cost can also be calculated by multiplying the probablity with the estimates. ie, $100 mn*50% and $500mn * 50% then it becomes ($50mn + $250mn), chances may be project cost may be between $100 mn < 300 mn < 500mn.

But in this case, 50% chance that will cost $100 mn and 50% chance that will cost $500, At this point of time the result is un-certain as the project will be $100 mn or $500 mn. So We have to implement the project on the basis of the Proportionate competion method or cost plus profit method. Later after arriving the significant cost of the project we can ensure that if the project cost incurred to complete the project is divisible on the basis of population to see that cost of project per head of population ie, 327 million people.

I hope the above information is usefull, kindly provide your valuable feedback and like.

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