CompTIA Project+ (PK0-005)Project Management ConceptsHard
A project manager is developing a new product. After conducting market research, it is determined that there is a 70% chance of high demand, which would result in a profit of $500,000, and a 30% chance of low demand, resulting in a loss of $100,000. What is the Expected Monetary Value (EMV) of proceeding with this new product?
- A$400,000
- B$350,000
- C$470,000
- D$320,000
Show answer & explanationAnswer & explanation
Correct answer: D. $320,000
EMV = (Probability of High Demand * Profit from High Demand) + (Probability of Low Demand * Loss from Low Demand). EMV = (0.70 * $500,000) + (0.30 * -$100,000) = $350,000 - $30,000 = $320,000.
Why the other options are wrong
- A. Incorrect. This might be a miscalculation or ignoring the negative outcome's impact.
- B. Incorrect. This is only the positive outcome (0.70 * $500,000).
- C. Incorrect. This is a miscalculation or an incorrect application of the formula.
Expected Monetary Value (EMV)
A quantitative risk analysis technique that calculates the average outcome when the future includes scenarios that may or may not happen. It's used for decision-making under uncertainty.
- Calculated as Probability x Impact for each scenario.
- Sum of EMVs for all possible outcomes.
- Helps in comparing different project options with varying risks.
Memory trick: Quantify risks to make decisions with EMV.