Join Oliver Yarbrough for an in-depth discussion in this video Expected monetary value (EMV) question, part of Exam Tips: Certified Associate in Project Management (CAPM)®.
- When you're faced with multiple options but you can only choose one, how do you make the best decision? For example, do you build a new plant or upgrade the old one? To make the right decision, you calculate an expected monetary value. EMV is primarily used in risk management to numerically prioritize risk. EMV analysis allows potential alternatives to be evaluated by factoring in both probability and impact for every possible decision.
EMV is a risk neutral technique that's void of all emotion. It's a process that will help you decide based strictly on the numbers. If you recall, exposure equals probability multiplied by impact. Positive risks or opportunities are normally expressed as positive values while negative risks or threats are normally expressed as negative values. Another way to look at EMV is that it's the summation of the exposures for each possible outcome.
Let me give you an example of the type of question you might see on the exam. You're working on a project where you have to decide whether to build a new piece of software for $100,000 or upgrade existing software for $50,000. If you build the new piece of software, there's a 40% chance it will greatly improve results and make $150,000. On the other hand, there's a 60% chance it will barely improve results and only make $75,000. What is the EMV if you build the new piece of software? You should quickly note that this question will require you to calculate the exposures in order to determine the EMV.
The project is at the intersection of planning and risk management. More specifically, your quantitated risk analysis. Do you see anything you can eliminate from the question? Actually, there is. The $50,000 cost to upgrade the existing software is extra information. In order to eliminate answer choices, you'll need to first calculate the exposures and then add them together. We know E equals P times I so the exposure for greatly improving results is calculated.
150,000 the possible results minus 100,000 the cost to build the software equals an impact of 50,000. That impact of 50,000 multiplied by the 40% probability equals an exposure of $20,000. The exposure for barely improving results is 75,000 minus 100,000 equals negative 25,000. That negative $25,000 impact multiplied by the 60% probability equals an exposure of negative 15,000.
Now you can add the exposures together to come up with the EMV for building the new piece of software. Since the EMV is $5,000, you can eliminate all the other answer choices. Answer D is the correct answer. Keep in mind, you can't make a decision on the overall project based on a single EMV. However, you know where you stand as far as building the new piece of software. Make sure you're clear on what the question is asking before diving into the calculations.
- What to expect on exam day
- Reviewing the fundamental aspects of project management
- Key success factors
- Navigating the CAPM® exam
- Managing your time on the exam
- Reviewing practice questions
- Establishing a solid study routine
- Reading for understanding