W8- ALi Hubais -Expected monetary value Anaylsis


1. Problem Definition

Whenever someone started to work he will thank to buy new house or to buy land and built new house so I would like to compare between this two options. Buying new house or buying land and built new house .

2. Identify the Feasible Alternative

The two alternatives are as per the following below:-

  • Buying new house
  • Buying land and building new house

3. Development of the Outcome for Alternative

As per our discussion with the consultancy we come to get the following information as per consultant survey.

Alternatives Good Economic Condition (0.6) Poor Economic Conditions (0.4)
Buy new house OMR 90,000 OMR 80,000
Buy Land & Build a house OMR 25,000 + OMR 50,000 OMR 20,000 + OMR 40,000

Table-1 Consultant Survey

4. Selection Criteria

The Monterey analysis value will be used to choose one of the best options and so far it will be shown in the tree below (decision analysis).

The expected monetary Value will calculate the average outcome of EV scenarios that it may or may not occur.

Whenever we are calculating the Expected Monetary Value in project risk management, we need to:

  • First to assign a probability of occurrence for the risk.
  • Second to assign monetary value of the impact of the risk when it occurs.
  • Third to Multiply Step 1 and Step 2.

So after performing the step 3 we will get 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 define as total of the weighted outcomes (payoffs) associated with a decision, the weights reflecting the probabilities of the alternative events that produce the possible payoff. It is expressed mathematically as the product of an event’s probability of occurrence and the gain or loss that will result.The expected monetary value of each alternative would be as follow:

Buy new House / Buy land & Build house
Buy New House Buy Land & Build House
Buy Land Build House
0.6- Good Econ Condition                  (90,000) 0.4- Poor Econ Condition                  (80,000) 0.6- Good Econ Condition                  (25,000) 0.4- Poor Econ Condition                  (20,000) 0.6- Good Econ Condition                  (50,000) 0.4- Poor Econ Condition                  (40,000)
0.6*25,000 = 15,000 0.4*20,000 = 8,000 0.6*50,000 =30,000 0.4*40,000 =16,000
54,000+32,000 =86,000

0.6*90,000 = 54,000

0.4*80,000 = 32,000
23,000+46,000= 69,000

15,000+8,000 =23,000

30,000+16,000 =46,000

Figure -1 EMV decision Tree

6. Selection of the Preferred Alternative

When we look to the above chart it come to us two thing the time and the cost where in our above analysis we only consider the cost and the best option as per the cost consideration is to buy the land and built house

7. Performance Monitoring and the Post Evaluation of Result

So the EMV helps the decision maker to make decision in faster way and to have at least so basic study on what to select is short term study where the information has to be collected in advance .

8. Reference:

  1. Expected monetary value retrieved July 25, 2014 http://www.businessdictionary.com/definition/expected-monetary-value.html
  2. Sharma, R., & McDonough, M. (2013, November 6). How to Calculate Expected Monetary Value (EMV): Examples. Retrieved July 25, 2014, from http://www.brighthubpm.com/risk-management/48245-calculating-expected-monetary-value-emv/
  3. Decision Tree Risk Analysis? PMP Primer. (n.d.). Retrieved July 25, 2014, from http://www.pm-primer.com/decision-tree-risk-analysis/

 

 

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One thought on “W8- ALi Hubais -Expected monetary value Anaylsis

  1. Hi Ali,
    Not sure who gave you only one star but I gave you 4 stars on this. Your case study was a real one and setting it up as a decision tree was appropriate and it looks like your math was correctly done.

    My only comment or suggestion would be to download a program called “Snag It” by Techsmith http://www.techsmith.com/download/snagit/ and if you do that it makes it easy to capture your calculations done in Excel. If you turn to my handouts, Day 5, slide #60, you can see an example of what your calculations should have looked like to earn you 5 stars.

    Make sense?

    BR,
    Dr. PDG, Jakarta

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