CompTIA Project+ (PK0-005)Project Management ConceptsHard
A project manager is evaluating potential risks for a new product launch. One identified risk is 'Component X supplier goes out of business,' with a probability of 20% and an estimated impact cost of $50,000. Another risk is 'Major competitor launches similar product first,' with a probability of 10% and an estimated impact cost of $150,000. Which risk has the higher Expected Monetary Value (EMV), and what is that value?
- AMajor competitor: $15,000
- BComponent X supplier: $25,000
- CComponent X supplier: $10,000
- DMajor competitor: $30,000
Show answer & explanationAnswer & explanation
Correct answer: A. Major competitor: $15,000
EMV is calculated as Probability x Impact. For Component X supplier: 0.20 * $50,000 = $10,000. For Major competitor: 0.10 * $150,000 = $15,000. Therefore, the 'Major competitor' risk has a higher EMV of $15,000.
Why the other options are wrong
- B. Incorrect calculation for supplier risk.
- C. This is the correct EMV for the supplier risk, but it's not the higher EMV.
- D. Incorrect calculation for competitor risk.
Expected Monetary Value (EMV)
A quantitative risk analysis technique that calculates the average outcome of a future scenario that may or may not happen. It is calculated by multiplying the probability of a risk event by its monetary impact.
- EMV = Probability (P) x Impact (I).
- Used to prioritize risks based on their financial exposure.
- Helps in decision-making under uncertainty.
Memory trick: EMV: Expect Money Value, Probability times Impact is the key.