CompTIA Project+ (PK0-005)Project Management ConceptsHard
A project manager is evaluating a new product development project. The project has a 60% chance of success, which would yield a profit of $1,000,000. However, there's a 40% chance of failure, resulting in a loss of $300,000 due to research and development costs. What is the Expected Monetary Value (EMV) of this project?
- A$700,000
- B$880,000
- C$600,000
- D$480,000
Show answer & explanationAnswer & explanation
Correct answer: D. $480,000
EMV is calculated as (Probability of Success * Value of Success) + (Probability of Failure * Value of Failure). So, (0.60 * $1,000,000) + (0.40 * -$300,000) = $600,000 - $120,000 = $480,000.
Why the other options are wrong
- A. Incorrect. This might be a miscalculation where the loss is subtracted from the profit without considering probabilities, or an error in the negative value.
- B. Incorrect. This suggests an error in calculation, possibly adding the loss instead of subtracting.
- C. Incorrect. This only accounts for the success scenario.
Expected Monetary Value (EMV)
A statistical technique that calculates the average outcome when the future includes scenarios that may or may not happen. It is typically used in decision tree analysis.
- Calculated by multiplying the value of each possible outcome by its probability of occurrence and summing the products.
- Used to quantify the financial impact of risk events.
- Helps in making decisions under uncertainty.
Memory trick: EMV is the sum of (Probability * Impact) for all scenarios.