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

Answer:

The EMV of this project is -17,500

Step-by-step 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