W6 _Said Alamri_ Investment Decision Using Expected Monetary Value (EMV)


1. Problem Recognition
Board of directors of LPG plant wants to increase plant production. The engineering consultant gave two options: buy additional machines and production will increase by 60% with cost 20M$ US dollars or upgrade the old machines to increase the production by 30% with cost of 7M$ US dollars. Expected monetary value will be used to decide which option to be considered. Taking in consideration the risk of market demand for LPG.

2. Development the Feasible Alternative
additional machines will increase production by 60% with cost 20M$ US dollars or upgrade the old machines to increase production by 30% with cost of 7M$ US dollars.

2. Development of the Outcome for Alternative
Expected monetary value will be calculated for each option to decide which to be considered.

4. Selection of Criteria
Option with highest EMV will be selected.

5. Analysis and Comparison of the Alternative
Decision chart created for the alternatives in figure-1 to decide the option with highest EMV:

Figure-1 Decision chart for alternatives

Figure-1 Decision chart for alternatives

 

6. Selection of the Preferred Alternative

From decision chart the second option which is upgrade old machines is considered because it has the highest EMV.

7. Performance Monitoring and the Post Evaluation of Result

Upgrade old machine is the lowest risk option to be considered despite of market demand.

8. References:

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One thought on “W6 _Said Alamri_ Investment Decision Using Expected Monetary Value (EMV)

  1. EXCELLENT posting, Said!! Nice case study and your analysis was spot on.

    I can almost guaranty that you will see an EMV problem on your PMP exam, it was well worth your time and effort to understand exactly how EMV works.

    Where we tend to find EMV used most often is in quantifying RISKS. If you turn to my handouts from Day 2, Slide #45, and look at columns G, H I and J, you can see how EMV is used in risk analysis.

    Keep up the great work and looking forward to seeing more blogs like this in the remaining weeks.

    BR,
    Dr. PDG, Jakart

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