Expected Monetary Value

5 minutes 5 Questions

Expected Monetary Value (EMV) is a quantitative risk analysis technique used in project risk management to estimate the potential financial impact of risks. EMV calculates the weighted average of all possible outcomes, providing a single monetary value as the expected outcome. This is achieved by m…

Expected Monetary Value (EMV) - Project Risk Analysis

Expected Monetary Value (EMV) is an important concept in Project Risk Analysis. It is a statistical technique in risk management used to quantify the average outcome when the future includes scenarios that may or may not happen.

Why it is important:
EMV helps in assessing the amount of money or value expected to be gained or lost if a certain risk occurs. Consequently, it assists project managers in making data-based decisions regarding risk responses.

What it is:
As mentioned, Expected Monetary Value is a risk management technique used to quantify and understand the impact of potential risks on project objectives. It's done by multiplying the probability of each potential outcome by its potential impact if it were to occur.

How it works:
The general formula for expected monetary value (EMV) is:
EMV = Probability x Impact
Here, 'Probability' is the chance of the risk occurring, and 'Impact' is the impact on the project if the risk happens.

Exam Tips - Answering Questions on Expected Monetary Value:
1. Understand the Mathematics: Make sure you're comfortable with the basic concept and calculations involved in EMV. Understand how to multiply probabilities with impact values.
2. Interpretation of Results: Ensure you know what the results mean. For instance, a positive EMV indicates a likely gain or benefit, while a negative EMV suggests a potential loss.
3. Identify Relevant Information: In exam questions, locate the probabilities and impacts provided.
4. Negative Impacts: Remember that risks aren't only negative. Positive risks (also called opportunities) can impact the project positively, and this should reflect in your EMV calculations.
5. Practice: The best way to prepare is to practice with sample questions. This will help you become faster and more accurate.

Test mode:

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Question 1

In a software project, there is a 30% chance of a risk occurring with a potential impact of $12,000 on the budget. A response strategy is proposed with a cost of $3,500 that would reduce the risk probability to 10%. Should the project manager implement the strategy, considering the cost?

No Transfer the risk Postpone the decision Accept the risk

Correct Answer: No

To determine whether the project manager should implement the strategy, let's consider the Expected Monetary Value (EMV) of the risk before and after the proposed response strategy. Before the strategy: - The risk has a 30% chance of occurring, with a potential impact of $12,000. - EMV before strategy = Probability of risk * Impact = 30% * $12,000 = $3,600. After implementing the strategy: - The risk probability is reduced to 10%, and the strategy costs $3,500. - EMV after strategy = New probability of risk * Impact = 10% * $12,000 = $1,200. - The net cost after applying the strategy = EMV after strategy + Cost of strategy = $1,200 + $3,500 = $4,700. Comparing the two scenarios: - Before the strategy, the EMV is $3,600. - After the strategy, the net cost (considering both the EMV and the cost of the strategy) is $4,700. Since the net cost after applying the strategy ($4,700) is higher than the EMV before the strategy ($3,600), it is not cost-effective to implement the strategy. The answer is: - No, the project manager should not implement the strategy considering the cost.

Question 2

A project has three identified risks: Risk 1 with a probability of 0.4 and a potential impact of $8,000, Risk 2 with a probability of 0.3 and a potential impact of $12,000, and Risk 3 with a probability of 0.2 and a potential impact of $20,000. What is the total Expected Monetary Value (EMV) for these risks?

$12,000 $10,800 $15,200 $9,600

Correct Answer: $10,800

The total Expected Monetary Value (EMV) for these risks is calculated by multiplying the probability of each risk by its potential impact and then summing these figures together. For Risk 1, the EMV is 0.4 * $8,000 = $3,200. For Risk 2, the EMV is 0.3 * $12,000 = $3,600. For Risk 3, the EMV is 0.2 * $20,000 = $4,000. Adding these EMVs together gives a total EMV of $10,800. The other figures - $9,600, $12,000 and $15,200 do not correctly represent the total EMV of the risks according to the given probabilities and impacts.

Question 3

A project has three identified risks. Risk X has a 60% probability of occurrence with a $5,000 impact, Risk Y has a 40% probability of occurrence with a $7,500 impact, and Risk Z has a 20% probability of occurrence with a $10,000 impact. What is the Expected Monetary Value (EMV) of Risk Y?

$2,750 $3,000 $1,500 $2,000

Correct Answer: $3,000

The Expected Monetary Value (EMV) is calculated by multiplying the impact of the risk by its probability of occurrence. In the case of Risk Y, the impact is $7,500 and the probability of occurrence is 40%. So, the EMV of Risk Y is calculated as 7500 * 0.4 = $3,000. The other answers are incorrect as they do not correctly apply the formula for EMV.

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