You are planning to make modifications to an existing application. You have identified:

30% probability of delay of receipt of resources - cost $50,000.
20% probability that the resources will be $10,000 cheaper than planned.
25% probability that there will be a problem integrating with existing software, cost to fix $3,500.
30% probability that the development may be simpler than expected, savings $2,500.
5% probability of a design defect causing $5,000 of rework.

Calculate the net expected value for the project risks and opportunities cited above. How much should you plan for your contingency reserve budget based on the above? You must show all of your calculations. How much would you allocate for the management reserve? What are your assumptions about these reserves?

Solution Preview

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).
http://www.brighthub.com/office/project-management/articles/48245.aspx

Hence for the above case:
1) Risk factors are:
30% ...

... First, you need to calculate the Expected Monetary Value (EMV) for each alternative by multiplying the result with the probability of each state. ...

... d. We now calculate EVPI (expected value of perfect information). Using EPC and EMV. We calculate EPC. ... The maximum EMV is 6000 as calculated in c. Then. ...

... perfect information (EVwoPI) is the calculated in part b. The calculations of expected value with perfect ... To calculate EVwPI it is assumed that nature of ...

... 4: Wheel of Fortune Comparing the Outcomes Introducing the Expected Monetary Value Summary Relevant ... so if he loses the grant, he'll have no money to run ...

... But how were these calculated? ... information and Bayes' theorem to calculate posterior probabilities ... publishing as Prentice Hall Calculating Revised Probabilities. ...

... First, you need to calculate the Expected Monetary Value (EMV) for each alternative by multiplying the result with the probability of each state. ...

... trees for each question below along with answers 1) Calculate the EMV 2 ...Expected Monetary Value. Output EMV Total EMV Probability Cost $28 million $0 million $3 ...

... Draw a diagram and calculate the EMV... calculation, multiplied these two values (the probability ... 10 Low Medium High Expected Monetary Value Calculation Project 1 ...

... newsletter can be determined by calculated using EVPI ... $0 Calculating expected utilities at various nodes of ... 0.7615) Therfore, using the expected utility criteria ...