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# Steps to Calculate Expected Monetary Value (EMV)

## To calculate the Expected Monetary Value in project risk management,

you need to:
1. Assign a probability of occurrence for the risk.
2. Assign monetary value of the impact of the risk when it occurs.
3. Multiply Step 1 and Step 2.
The value you get after performing Step 3 is the Expected Monetary
Value. This value is positive for opportunities (positive risks) and
negative for threats (negative risks). Project risk management requires
you to address both types of project risks.
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## Expected Monetary Value Example for Project Risk Management

Suppose you are leading a construction project. Weather, cost of
construction material, and labor turmoil are key project risks found in
most construction projects:
Project Risks 1 - Weather: There is a 25 percent chance of excessive
snow fall thatll delay the construction for two weeks which will, in
turn, cost the project \$80,000.
Project Risks 2 - Cost of Construction Material: There is a 10
percent probability of the price of construction material dropping,
which will save the project \$100,000.
Project Risks 3 - Labor Turmoil: There is a 5 percent probability of
construction coming to a halt if the workers go on strike. The impact
geographic area to determine whether this risk would have a higher
probability.
Note: Regardless of the type of project, the golden rules of project risk
management do not change. Hence, though this example is from the
construction industry , the theory is applicable to other industries, such
as software development and manufacturing.
Next, let's see how to quantify the project risks by calculating the
Expected Monetary Value of each risk.
Expected Monetary Value Calculation for Project Risk
Management
In this Expected Monetary Value example, we have two negative project
risks (Weather and Labor Turmoil) and a positive project risks (Cost of

## Construction Material). The Expected Monetary Value for the project

risks:
Weather: 25/100 * (-\$80,000) = - \$ 20,000
Cost of Construction Material: 10/100 * (\$100,000) = \$ 10,000
Labor Turmoil: 5/100 * (-\$150,000) = - \$7,500
Note: Though the highest impact is caused by the Labor Turmoil project
risk, the Expected Monetary Value is the lowest. This is because the
probability of it occurring is very low.
This means that if the:

## Weather negative project risks occurs, the project loses \$20,000,

Cost of Construction Material positive project risks occurs, the
project gains \$10,000, and
Labor Turmoil negative project risks occurs the project loses \$ 7,500
The projects Expected Monetary Value based on these project risks is:
-(\$20,000) + (\$10,000) (\$7,500) = - \$17,500
Therefore, if all risks occur in the construction project, the project would
lose \$17,500. In this scenario, the project manager can add \$17,500 to the
budget to compensate for this. This is a simplistic Expected Monetary
Value calculation example. Another technique used to calculate complex
Expected Monetary Value calculations is by conducting Decision Tree
Analysis. This analysis helps while making complex project risk
Decision Trees Example in Project Risk Management to Calculate
Expected Monetary Value.
As a project manager, you may apply different production techniques to
minimize risk. For example, if this example was based on software
development or manufacturing, the project manager could use Lean
thinking to reduce waste and minimize risk. However, the method for
computing Expected Monetary Value during project risk management
would notchange .
This is our 26th post in our new learning series: PMP Concepts
Each post within this series will present a comparison of common concepts that appear on the PMP and CAPM
exams.
Sensitivity Analysis versus Expected Monetary Value (EMV)
There are two techniques used in quantitative risk analysis: a sensitivity analysis and an expected monetary value
(EMV) analysis.
Sensitivity Analysis
A sensitivity analysis determines which risks have the most potential impact on the project.
Sensitivity charts are used to visualize impacts (best and worst outcome values) of different uncertain variables over
their individual ranges.
A tornado diagram is a type of sensitivity chart where the variable with the highest impact is placed at the top of the
chart followed by other variables in descending impact order.
Expected Monetary Value (EMV)
Expected monetary value (EMV) analysis is a statistical concept that calculates the average outcome when the future
includes scenarios that may or may not happen. An EMV analysis is usually mapped out using a decision tree to
represent the different options or scenarios.

EMV for a project is calculated by multiplying the value of each possible outcome by its probability of occurrence and
Example
For a sensitivity analysis, the project risks are evaluated based on the potential financial impact of each individual risk
and then placed in rank order.
For an EMV analysis, you are evaluating two vendors:
Vendor A has a 50% probability of being on-time, a 30% probability of being late at an additional cost of \$40,000 and
a 20% probability of delivering early at a savings of \$20,000.
EMV: (30% x \$40,000) + (20% x -\$20,000) = \$12,000 + (\$4,000) = \$8,000
Vendor B has a 30% probability of being on-time, a 40% probability of being late at an additional cost of \$40,000 and
a 30% probability of delivering early at a savings of \$20,000.
EMV: (40% x \$40,000) + (30% x -\$20,000) = \$16,000 + (\$6,000) = \$10,000
Based on the EMV, Vendor A would be a better choice as the potential cost is lower.
Summary
Two common quantitative risk analysis techniques are sensitivity and expected monetary value (EMV) analyses.
A sensitivity analysis ranks risks based on their impact (usually in a tornado diagram) and an EMV analysis quantifies
the potential outcomes of risk scenarios (usually using a decision tree).
PMP CONCEPT 27: Deming vs Juran vs Crosby

## How to Calculate Expected Monetary Value

(EMV)
Expected monetary value (EMV) is a ballpark figure that shows how much money a plaintiff canreasonably expect in mediation. Think
of it as an average of the best- and worst-case scenarios. It accounts not only for the dollar figure assigned to each outcome but also
for the likelihood of that outcome occurring.
To calculate EMV, multiply the dollar value of each possible outcome by each outcomes chance of occurring (percentage), and total
the results.
For example, if you bet \$60 that Ill roll a die and itll come up on the number 4, the EMV is \$40, because you have a 1 in 6 chance of
winning \$60 and a 5 in 6 chance of losing \$60:

If you had the choice of which bet to make, youd be wise to listen to the EMVs and opt for the coin flip.
As you may expect, EMVs get more complicated when you toss in a string of multiple outcomes. Heres an example from John
DeGroote. It starts with the decision tree shown here. (The values include attorney fees, and \$124,000 represents the EMV for no
settlement.)

A decision-tree program generated the tree and already calculated the EMV for the no settlement outcome, but youre probably
wondering how it came up with that number. To calculate the EMV for the no settlement, start on the far right, where the plaintiff has a
30 percent chance of winning a \$250,000 judgment, 60 percent chance for \$350,000, and 10 percent chance for \$650,000:
(.30 x \$250,000) + (.60 x \$350,000) + (.10 x \$650,000) =
\$75,000 + \$210,000 + \$65,000 = \$350,000

Now, you must multiply that by the 50 percent chance that the plaintiff wins the verdict half of \$350,000 is \$175,000.
The EMV for the defendants verdict is 50 percent of \$150,000, or \$75,000.
Add the EMVs for the defendant and plaintiff: \$175,000 for the plaintiff plus \$75,000 for the defendant gives you \$250,000. Because
the summary judgment denied outcome has a 40 percent chance of occurring, multiply the \$250,000 by .40 to get \$100,000.
The EMV for summary judgment granted is 60 percent of \$40,000, which comes to \$24,000.
Total the EMV for summary judgment granted and summary judgment denied, and you get \$100,000 + \$24,000 = \$124,000, which
represents the EMV for no settlement.
This EMV is likely to give the client a new perspective, especially if the client is the plaintiff whos convinced of winning a settlement of
\$650,000. Compared to an EMV of \$124,000, a much lower sure-thing settlement of, say, \$300,000 looks much more attractive.

## Decision tree analysis and Expected

Monetary Value
These are one of the techniques used when carrying out the process perform quantitative risk analysis, and is used as the
first step in determining the uncertainties within the project in all of to get better information upon which to make a
judgment.
This technique will normally occur by using subject matter experts all people with experience with this type of project.
The focus here will be on the determining those risks that may impact upon schedule or cost of the project.

The Decision Tree analysis will enable you to make better decisions, and to determine the most appropriate actions for
both risk threats and opportunities and hence assist in the Plan Risk Responses process.

## Expected monetary value (EMV) within the decision tree.

The decision tree technique is there to establish a costs order point that based on various risk scenarios, so the decision
tree needs to be drawn up correctly and logically.
The best way to do this is to arrange a meeting or workshop so that the various risk scenarios can be brainstormed and
probability of the scenario estimated. From the list, the monetary value must be determined that is associated with each
outcome by multiplying the risk probability times the monetary value of each outcome.

The monetary value of the Decision Tree risk outcomes can now be added to get the expected monetary value of the risk
of decision.

## This is best understood by using a simple example:

Dave owns a condo in the Far East and is considering buying a new apartment in Italy, but his wife would rather spend
the money on modernizing their current condo.

been a problem in the Far East.

Remodelling costs of the condo if new furniture and fittings are available will cost \$ 45,000, but there is a 50/50 chance
that the furniture is not available locally and will need to be imported which will then cost \$65,000.

Dave has found an old townhouse in Naples but it will need a lot of work to make it habitable. The price is \$ 105,000. He
has found a local builder and he has given you a best case cost of \$55,000 and a worst case cost of \$75,000. The builder
advises that the best case is 60% likely.

Dave expects to get \$160,000 for the sale of his condo, and now needs to discuss the possible outcomes with his wife.
Draw a decision tree and calculate the Net Path Value (Expected Monetary Value).

Laying out this scenario as a Decision Tree with the various outcomes might look like this:

So once you have the Decision Tree drawn, it is fairly straightforward to calculate the numbers.

Take the assumption of the furniture being available for purchase, this is 50% likely to happen and if it did it would cost
\$45,000. So the math is just 0.5 times \$45,000 = \$22,500.

Summing the EMV for the refurbish condo option gives \$57,000, and similarly for the move to Italy, gives \$63,000.

## So this suggests a lower risk cost for refurbishing.

Notice that the selling and buying of the properties have not been factored in here for simplicity.

In the real world, this would need to have other factors added, such as the cost of selling and buying, the likely market
situation to do that, the time frames involved and so on. However, this example is typical of a PMP exam question.
- See more at: http://www.pm-primer.com/decision-tree-risk-analysis/#sthash.XhQooHgU.dpuf