I.

CPM/PERT (CRITICAL PATH METHOD AND PROJECT EVALUATION Solution

AND REVIEW TECHNIQUE)

Introduction

The Key Concept used by CPM/PERT is that a set of

activities, which make up the longest path through the
activity network, determine the entire project length.

If these "critical" activities could be identified and assigned to

responsible persons, management resources could be
optimally used by concentrating on the few activities which
determine the fate of the entire project.

CPM vs PERT Path Duration

ABDFG 12
CPM assigns a single time estimate to each network activity. ACDFG 14
ACEG 13
PERT uses three activity times for each activity.
The critical path in this case is ACDFG, and the project will
Drawing the CPM/PERT Network take a minimum of 14 weeks to be completed.

Each activity (or sub-project) in a PERT/CPM Network is PERT Variability in Activity Times
represented by an arrow symbol. Each activity is preceded
and succeeded by an event, represented as a circle and Activity times can be described by a Beta distribution with a
numbered. mean and variance that can be approximated with three
estimates. These values will be given.
Given
Estimates:
Activity Predecessor Duration (wks) 1. Optimistic time – the shortest possible time within
A None 2 which the activity could be completed if everything went
B A 3 right.
C A 5 2. Most Likely Time – the time that would most frequently
D B, C 1 occur if the activity were repeated many times.
3. Pessimistic Time – the longest possible time the
Solution activity would require to be completed, assuming that
everything went wrong.

Mean and Variance of a Beta Distribution

1. a – optimistic time estimate

2. m – most likely time estimate
3. b – pessimistic time estimate
( )

{ }
A will come before B and C, which will come before D.
B and C cannot begin until A is completed. Given (In red is solution)
B and C must be completed before D begins.
Act. Pre. Duration ET Var.
Determining the Critical Path
a m b
The critical path is the path with the longest duration. A None 2
1. Draw the network using nodes and arrows based on the 1 4 2.2 0.25
given table. B A 2 3 5 3.2 0.25
2. Get the duration of all the paths. C A 5
3. Choose the path with the longest duration. 2 8 5.0 1.00
D B, C 1 1 1 1.0 0.00
Given E C 4
2 7 4.2 0.69
Activity Predecessor Duration (wks) F D 1 4 5 3.7 0.44
A None 2 G E, F 2
1 3 2.0 0.11
B A 3
C A 5
D B, C 1
E C 4
F D 4
G E, F 2
 Solution Standard Normal Distribution Table

In the same way as doing a normal critical path, look for all
possible paths and list out their times.

Path Duration
ABDFG 12.1
ACDFG 13.9
ACEG 13.4

Critical path is ACDFG at 13.9 weeks. The expected project

completion time is 13.9 weeks.

Probability Analysis Given

Determine probability of finishing the project in 13 days or

less. Use the previous table in solving.

Solution
2
1. Σσ = 0.25 + 1 + 0 + 0.44 + 0.11 = 1.81
2. = -1.41
3. Looking at the standard normal distribution table, we
first look for the first two digits on the left side of the
table, in this case, 1.4. Then, look for the third digit, in
this case 0.01. We will find at the intersection the
number 0.92073, or 92.07%.
4. Note: If Z is >=0, the percent is the number seen in
the table. If Z <0, minus the percent from 1. This is
Determine the probability of completing a project before a due to its relation to µ.
desired time/date knowing its expected time and variances. a. So in our case, since our Z = -1.41, we do 1-
0.92073, which will give us 0.07927
1. Sum the variances associated with the critical path. 5. Thus, the chance of completing the project in 13 days or
2. Compute the Z transformation formula. less is 7.93%

Crashing Costs

Shortening the total duration of a project is called a project

3. Refer to standard normal distribution table (or
=NORM.S.DIST(Z, true) in excel) to get the probability.
crashing cost.
When crashing, make sure you are:
1. Crashing along the critical path (otherwise it will not
affect the project duration). Note that the critical path
can change while you are crashing.
2. Crashing at the lowest possible crash cost per week.

3. Crashing only until the next highest critical path.

a. If your CP now is 14 weeks, and the next longest
path is 12 weeks, crash until 12 weeks
4. Crashing until all paths meet target duration/cost
a. If the target duration is 10 weeks, make sure all
paths are at most 10 weeks after crashing
Given Begin crashing the longest path, ACDFG

Given the following, how much would you spend to execute

the project in 10 days?

Crash Changes Total

F x 1 @ 400 = 400 F=2 400

Now we have two CPs, ACDFG and ACEG at 13 weeks. We

first look at the common nodes, in this case A and G, and
choose the cheaper. But also look at possible other options
which may be cheaper.

Activity Duration Cost (PHP)

Normal Crash Normal Crash
A 2 1 10,000 12,000
B 3 2 17,000 18,500
C 5 2 4,000 10,000
D 1 1 1,000 1,000
E 4 2 800 1,200
F 4 1 20,000 21,200
G 2 1 8,000 9,000

Solution Crash Changes Total

First, determine the number of weeks that can be crashed G x 1 @ 1,000 = 400 G=0 1,400
per event.
A can be crashed for a total of 1 week, while C can be
crashed for a total of 3 weeks. D cannot be crashed.

Second, solve for how much it would cost to crash each

week. Get the difference between the crash cost and normal
cost, and divide this by the possible number of weeks that
can be crashed.
A has a total crash cost of 2,000 divided by 1 week, or
2,000/week. E has a total crash cost of 1,200 divided by 2
weeks, or 400/week.

Third, determine all the possible paths and their durations.

Fourth, begin crashing per week.

Activity Weeks Cost (PHP)/wk

A 1 2000
B 1 1500
C 3 2000 Now all three paths are CPs at 12 weeks. Since G is at 0, we
cannot crash it. That leaves A as a common node. However,
D 0 - looking at the costs, if we crash both E and F, we can
E 2 200 shorten all paths to 10 days at a cost cheaper than crashing
A.
F 3 400
G 1 1000 Crash Changes Total
E x 2 @ 200 = 400 E=0
Path Duration 2,600
F x 2 @ 400 = 800 F=0
ABDFG 12
ACDFG 14 Now all paths are at 10 weeks with a total crash cost of 2,600.
ACEG 13
 P0 =
Note!
Pn =
Make sure all paths are crashed to the target duration. ( )( )
If it asks for the probability of exactly n, use this
First check if there are common nodes, then check if there equation. If it asks for a range (eg. Less than 3
are other nodes that can be crashed at cheaper costs. people), solve for the probability of 0, 1 and 2
people, and add these together.

M/D/1 (Constant, Single, Infinite)

2. QUEUEING THEORY
Equations:
Basic Terms Ls = Lq

Basic Variables (there are only 2!) Ws = Wq

λ = Arrival rate (arrivals/time)
Lq =
μ = Service rate (served/time)
( )
Equation definitions Wq =
Ls = Average length of system ( )
Ws = Average waiting time in system
Lq = Average length of queue
Wq = Average waiting time in queue Note!
ρ = Utilization factor for the system
P0 = Probability of no one in the system This part is straight forward, just input the variables into
Pn = Probability of n people in the system the right equations and solve. No need to do anything
fancy.
There are only two main variables, λ and μ. They have to be
in the form of people/time always (eg. 5 people in an hour). Step 1. Determine your λ and μ. (Lambda looks like
If it’s given in time/person, convert it to proper form (eg. If a someone walking, so this is your arrival rate)
person can be served in 5 minutes, do 5 minutes/60 minutes Step 2. Are your λ and μ in the right form (people/time)? If
to get 1/12, or 12 people per hour). not, convert it first.
Step 3. Determine if the service is constant or exponential.
L stands for the length of the line in terms of number of Step 4. Plug-in.
people, W for the waiting time in the line.

The subscript q stands for the queue only (without those
being served), and s stands for the whole system (including
those being served).
If you are outside McDonald’s and see 4 customers inside,
there are 3 people in the queue and 4 people in the system.
Determine Model (M/M/1 or M/D/1)
3. DECISION MAKING
Introduction
Making decisions are based on Expected Monetary Values
of said decisions, taking into account the likelihoods/
probabilities of certain outcomes.

M/M/1 refers to exponential service time for a single line and
infinite population to be served.
M/D/1 refers to constant service time for a single line and
infinite population to be served.
Expected Monetary Value
Decisions will be given, as well as their monetary value
based on certain events. Create a table listing out the
possibilities.

The difference is in the service time. If the service is by a
human, most likely it is M/M/1 (Assume this first). If the
service is set or constant (eg. machines, keywords such as
constant or exactly), use M/D/1.
M/M/1 (Exponential, Single, Infinite)
When solving for EMV, we use the equation:
EMV1 = Decision1 x Probability1 + Decision1 x Probability2
EMV2 = Decision2 x Probability1 + Decision2 x Probability2
We then get the EMV with the lowest cost or the highest
profit.

Equations Given
Ls =
A company plans to move its operations for the next 5 years.
Ws = If it moves to Chicago, it will cost them $200,000 to move,
and will pay a lease of $650,000 per year. If they move to
Lq = Midwest, it will cost them $1,000,000 to move, and pay a
( ) lease of $500,000 per year. The chance of the company
Wq = surviving 2 years is pegged at 75%.
( )
ρ =
 Solution

In this scenario, we have to identify what the decisions are,

and what the possible outcomes are.
Decisions: (1) Move to Chicago or (2) move to Midwest
Outcomes: (1) Survive or (2) fail

Once we’ve determined the decisions and outcomes, we

place them in a table, decisions on the vertical, outcomes on
the horizontal.
Move to Chicago and survive: $200,000 + $650,000 x 5
years = $3,450,000
Move to Chicago and fail: $200,000 + $650,000 x 2 years =
$1,500,000
The rest follow a similar computation.

Survive Fail
(0.75) (0.25)
Transfer to Chicago 3,450,000 1,500,000
Transfer to Midwest 3,500,000 2,000,000
The decisions to go to Chicago and Midwest were taken
We then solve for the EMV (Chicago, Survive, Fail): from the previous problem. The tree has a branch point if it
EMVC = DecisionC x ProbabilityS + DecisionC x ProbabilityF survives first two years since the company can either go to
EMVC = (3,450,000 x 0.75) + (1,500,000 x 0.25) Chicago or Midwest.
EMVC = 2,962,500 Move to Chicago: $750,000 x 2 years + $200,000 +
EMVM = 3,125,000 $650,000 x 3 years = $3,650,000
The rest follow a similar computation.
Based on the EMVs, we can see that the EMV of going to
Chicago entails lesser cost, and is thus the option we should
choose.

Decision Tree Analysis

When multiple decisions are required based on changing

outcomes, we can use the decision tree analysis.
For example, if we had the option of not moving immediately,
but staying for two years and then deciding to move, we We choose the Chicago option because it is the cheaper
could use a decision tree to see the results. option.

In making the decision tree, also note that a square is used

to describe a decision, while a circle is used to describe a
set of outcomes and probabilities.

Given

On top of the options to go to Chicago or Midwest, the

company can stay in its current location for the next 2 years We compute the survive rate based on Chicago, and
at $750,000, and then choose to either move to Chicago or compute for the EMV after.
Midwest after. Fail in two years: $750,000 x 2 years = $1,500,000

Solution

We can start by creating a tree listing the possible

alternatives.
 Given
Looking at the EMVs, choosing to move to Chicago
immediately is still the best option, with an expected mean A retail store has the following sales record for the daily
value (cost) of $2,962,500. demand of a certain product. (a) Develop a relative
frequency distribution for the given data. (b) Use random
numbers to simulate sales for a 10 day period.
Note!
Sales Frequency
Cases may vary between looking at expected costs, 0 4
profits or revenues. Remember which one you’re looking 1 6
at, because you want to pick the lowest costs and highest 2 14
profits, not the other way around! 3 12
4 7
5 5
Expected Value of Perfect Information 6 2
The EMV tells us the best decision if we do not know how Step 1: Add up frequency days.
certain some outcomes turn out. However, it is sometimes
possible to gain more information to learn the outcomes, Total frequencies: 4 + 6 + 14 + 12 + 7 + 5 + 2 = 50
allowing us to make the best decision overall. This
knowledge though will come at a cost. Step 2: Compute relative frequency distribution by
dividing each frequency by the total frequency days.
The Expected Value of Perfect Information (EVPI) allows us
to determine how much we are willing to spend to know For each frequency, divide it by 50.
more information about outcomes. It is the possible gains Relative Frequency0 = 4 / 50 = 0.08
due to access to additional information. Relative Frequency1 = 6 / 50 = 0.12
Relative Frequency2 = 14 / 50 = 0.28
The Expected Profit with Perfect Prediction (EPPP) is the …
possible gains with perfect information, or those indicated in Relative Frequency6 = 2 / 50 = 0.04
red. The total of the frequencies must equal 1.0
The EVPI is computed as the difference between EPPP and Step 3: Create a cumulative frequency table.
EMV, or the value of having perfect information and our
current expected value. Add the frequencies to the previous total.
CF0 = 0.08
If we were to compare staying and going to Midwest, CF1 = 0.08 + 0.12 = 0.20
whether the company survives or fails in the next two years CF2 = 0.20 + 0.28 = 0.48
has an impact on which outcome is better. …
If the company survives, it is cheaper to transfer to the CF6 = 0.96 + 0.04 = 1.00
Midwest. If the company fails, it is cheaper to stay. The last cumulative frequency should be 1.0
Survive Fail Sales Frequency Relative Cumulative
(0.75) (0.25) Frequency Frequency
Stay 3,650,000 1,500,000 Distribution
Transfer to Midwest 3,500,000 2,000,000 0 4 0.08 0.08
1 6 0.12 0.20
EPPP = 3,500,000 x 0.75 + 1,500,000 x 0.25 = 3,000,000 2 14 0.28 0.48
EMVs = 3,112,500 3 12 0.24 0.72
EVPI = 3,000,000 – 3,112,500 = 112,500
4 7 0.14 0.86
The company is therefore willing to pay 112,500 to gain
5 5 0.10 0.96
more information about his chances of surviving.
6 2 0.04 1.00
4. SIMULATION Total 50 1

Simulation is building a replica of a real system using

probabilistic elements. The Monte Carlo technique is used
for selecting numbers randomly from a probability
distribution for use in the trial of a simulation model.

In a simulation problem, you will have to main variables, the

unit/event and the frequency.
Frequency is how much or how often the event/unit occurs.
Step 4: Set up random number ranges from 00 to 99 based
on the relative frequency distribution table (Monte Carlo
Process)

The ranges are whole numbers starting from the previous

number range to the CF. So for Sales of 2, since the
previous range end in 19 and the CF is 0.48, the range is
20 to 47.

Sales Freq. RFD CF Random

Number
range
0 4 0.08 0.08 00 - 07
1 6 0.12 0.20 08 - 19
2 14 0.28 0.48 20 - 47
3 12 0.24 0.72 48 - 71
4 7 0.14 0.86 72 - 85
5 5 0.10 0.96 86 - 95
6 2 0.04 1.00 96 - 99
Total 50 1

Step 5: Using the random numbers table, enter daily sales

based on generated numbers.

A table of random numbers will be given to us. Based on the

random number, find it in the range above, and place the
corresponding sales units.
The random number for day 1 is 64 (this is given). Looking
for 64 in the range, we see it corresponds to 3 units.
Therefore, the number of sales for day 1 is 3 units.

Day Random Sales

Numbers
1 64 3
2 86 5
3 26 2
4 8 1
5 61 3
6 3 0
7 63 3
8 52 3
9 3 0
10 25 2

The average for the 10 days of sales based on our

simulation is 2.2 units per day (a total of 22 units divided by
10 days).