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% ...

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

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