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EMV for a project is calculated by multiplying the value of each possible outcome by its probability of occurrence and
adding the products together.
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
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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.
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.
The monetary value of the Decision Tree risk outcomes can now be added to get the expected monetary value of the risk
of decision.
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.
Dave had previously considered modernizing your condo, but purchasing or importing modern furniture in your city has
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.
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