1. Problem Definition
In this blog we would like compare between two options and they are buy a house or buy a land and build a house.
2. Identify the Feasible Alternative
There are two alternatives and they are as below:-
- Buy a house
- Buy a land and Build the house
3. Development of the Outcome for Alternative
The cost consultant provided the following information
4. Selection Criteria
Expected Monterey value would be used to select the best option and it will be shown in the tree the decision analysis.
Expected Monetary Value Analysis calculates the average outcome of future scenarios that may or may not occur.
To calculate the Expected Monetary Value in project risk management, you need to:
- Assign a probability of occurrence for the risk.
- Assign monetary value of the impact of the risk when it occurs.
- Multiply Step 1 and Step 2.
The value you get after performing Step 3 is the Expected Monetary Value. This value is positive for opportunities (positive risks) and negative for threats (negative risks).
5. Analysis and Comparison of the Alternative
Expected Monetary Value (EMV) is defining to be weighted average of the monetary estimates of each outcome with its probability. The expected monetary value of each alternative would be as follow:
6. Selection of the Preferred Alternative
From the above chart the optimal option is to buy a house rather than Buy the land and construct the house. EMV does not mean the amount of money that would be used to buy a house
7. Performance Monitoring and the Post Evaluation of Result
From this simple study case, we conclude that Expected Monetary Value (EMV) helps the decision maker to take a quick decision in short term and this under the condition of the availably of the main information in order to make a correct decision.
- Decision Tree Risk Analysis? PMP Primer. (n.d.). Retrieved July 17, 2014, from http://www.pm-primer.com/decision-tree-risk-analysis/
- Exforsys , E. F. (2009, March 28). How to Use Expected Monetary Value (EMV) | IT Training and Consulting ? Exforsys. Retrieved July 17, 2014, from http://www.exforsys.com/career-center/risk-management/how-to-use-expected-monetary-value-emv.html
- Sharma, R., & McDonough, M. (2013, November 6). How to Calculate Expected Monetary Value (EMV): Examples. Retrieved July 17, 2014, from http://www.brighthubpm.com/risk-management/48245-calculating-expected-monetary-value-emv/
- VijayaKumar, A. (2013, February 16). Become a Certified Project Manager: Expected Monetary Value Analysis (EMV) [Web log post]. Retrieved from http://getpmpcertified.blogspot.com/2013/02/expected-monetary-value-analysis-emv.html