Question

You are evaluating the risks associated with a construction project. Through careful analysis you have developed a list of the following risks, probabilities those risks will happen, and the costs associated with them if they occur.

25% chance of Snowmaggedon which will delay the project at a cost of $35,000
10% chance of cost of construction materials dropping saving the project $70,000
10% probability a labor strike will occur delaying the schedule with a cost of $40,000
80% chance of new regulations mandated calling for higher inspection standards which will cost an additional $15,000 to mitigate
What is the EMV of this project?

Answer 1

The EMV of this project is -17,500

Explanation:

The EMV of the project is the Expected Money Value of the Project.

This value is given by the sum of each expected earning/cost multiplied by each probability.

So, in our problem

`EMV = P_(1) + P_(2) + P_(3) + P_(4)`

The problem states that there is a 25% chance of Snowmaggedon which will delay the project at a cost of $35,000. Since this is a cost,
`P_(1)` is negative.

`P_(1) = 0.25*(-35,000) = -8,750`

There is a 10% chance of cost of construction materials dropping saving the project $70,000. A saving is an earning, so
`P_(2)` is positive

`P_(2) = 0.10*70,000 = 7,000`

There is a 10% probability a labor strike will occur delaying the schedule with a cost of $40,000.

`P_(3) = 0.10*(-40,000) = -4,000`

There is a 80% chance of new regulations mandated calling for higher inspection standards which will cost an additional $15,000 to mitigate

`P_(4) = 0.80*(-15,000) = -12,000`

`EMV = P_(1) + P_(2) + P_(3) + P_(4) = -8,750 + 7,000 - 4,000 - 12,000 = -17,500`

The EMV of this project is -17,500