Answer:
The EMV for option a is $5,679,100
The EMV for option b is $5,719,200
Therefore, option b has the highest expected monetary value.
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
a) proceeding immediately with production of a new top-of-the-line stereo TV that has just completed prototype testing.
There are these following probabilities:
77% probability of selling 100,000 units at $610 each.
23% probability of selling 70,000 units at $610 each.
So
![EMV = 0.77*E_{1} + 0.23*E_{2}](https://tex.z-dn.net/?f=EMV%20%3D%200.77%2AE_%7B1%7D%20%2B%200.23%2AE_%7B2%7D)
![E_{1} = 100,000*610 = 6,100,000](https://tex.z-dn.net/?f=E_%7B1%7D%20%3D%20100%2C000%2A610%20%3D%206%2C100%2C000)
![E_{2} = 70,000*610 = 4,270,000](https://tex.z-dn.net/?f=E_%7B2%7D%20%3D%2070%2C000%2A610%20%3D%204%2C270%2C000)
![EMV = 0.77*E_{1} + 0.23*E_{2} = 0.77*(6,100,000) + 0.23*(4,270,000) = 5,679,100](https://tex.z-dn.net/?f=EMV%20%3D%200.77%2AE_%7B1%7D%20%2B%200.23%2AE_%7B2%7D%20%3D%200.77%2A%286%2C100%2C000%29%20%2B%200.23%2A%284%2C270%2C000%29%20%3D%205%2C679%2C100)
(b) having the value analysis team complete a study.
There are these following probabilities:
74% probability of selling 85,000 units at $720.
26% probability of selling 70,000 units at $720.
The cost of value engineering, at 120,000. So this value is going to be dereased from the EMV.
![EMV = 0.74*E_{1} + 0.26*E_{2} - 120,000](https://tex.z-dn.net/?f=EMV%20%3D%200.74%2AE_%7B1%7D%20%2B%200.26%2AE_%7B2%7D%20-%20120%2C000)
![E_{1} = 85,000*720 = 6,120,000](https://tex.z-dn.net/?f=E_%7B1%7D%20%3D%2085%2C000%2A720%20%3D%206%2C120%2C000)
![E_{2} = 70,000*720 = 5,040,000](https://tex.z-dn.net/?f=E_%7B2%7D%20%3D%2070%2C000%2A720%20%3D%205%2C040%2C000)
![EMV = 0.74*E_{1} + 0.26*E_{2} - 120,000 = 0.74*6,120,000 + 0.26*5,040,000 - 120,000 = 5,719,200](https://tex.z-dn.net/?f=EMV%20%3D%200.74%2AE_%7B1%7D%20%2B%200.26%2AE_%7B2%7D%20-%20120%2C000%20%3D%200.74%2A6%2C120%2C000%20%2B%200.26%2A5%2C040%2C000%20-%20120%2C000%20%3D%205%2C719%2C200)