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# Calculate Expected Monetary Value (EMV)

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I need help with the following:

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% ...

\$2.19

## Decision Analysis

Use the data in the following payoff matrix and regret matrix to answer the following questions:

Payoff Matrix

Airport is Built at Location
Land Purchased at Location(s) A B
A \$75.0 \$15.0
B (\$25.0) \$125.0
A&B \$52.0 \$66.0
None \$0.0 \$0.0

Regret Matrix

Airport is Built at Location
Land Purchased at Location(s) A B
A \$0.0 \$110.0
B \$100.0 \$0.0
A&B \$23.0 \$59.0
None \$75.0 \$125.0

17. What is the optimal decision regarding at which location(s) to purchase property using the MAXIMAX decision rule?

18. What is the optimal decision regarding at which location(s) to purchase property using the MAXIMIN decision rule?

19. What is the optimal decision regarding at which location(s) to purchase property using the Criterion of Realism decision rule, assuming that the coefficient of realism is 0.55?

20. What is the optimal decision regarding at which location(s) to purchase property using the Equally Likely decision rule?

21. What is the optimal decision regarding at which location(s) to purchase property using the MINIMAX Regret decision rule?

22. What is the optimal decision regarding at which location(s) to purchase property using the Expected Monetary Value decision rule, assuming the probability of the airport being built at location A is 0.55?

23. What is the optimal decision regarding at which location(s) to purchase property using the Expected Opportunity Loss decision rule, assuming the probability of the airport being built at location A is 0.55?

A consulting firm has contacted your company claiming that their analysis conclusively indicates that the probability the airport will be built at location A is 0.55 (i.e., they have perfect information regarding the probability of the airport being built at location A). The consultant has offered to share their analysis with your company for a fee of \$25.0 million.

24. What is the Expected Value of Perfect Information in this scenario?

25. Should your company accept the consultant's offer?

Develop a sensitivity analysis matrix that summarizes the expected monetary value for each possible alternative relative to the probability of location A being selected. Vary the probability of location A being selected from 0.0 to 1.0 in increments of 0.01. Plot the expected monetary value for each possible alternative versus the probability of location A being selected.

26. For what range of probability of the airport being built at location A is purchasing property at location A the optimal decision?

27. For what range of probability of the airport being built at location A is purchasing property at location B the optimal decision?

28. For what range of probability of the airport being built at location A is purchasing property at both locations A and B the optimal decision?

29. For what range of probability of the airport being built at location A is purchasing property at neither location A nor location B the optimal decision?

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