- Problem Definition
As civil engineering background, in this blog, we would like to compare between two options which are either to buy a ready house or buy a land and build a house by EMV method.
- Identify the Feasible Alternative
There are two alternatives as following:-
- Buy a house
- Buy a land and Build the house
- Development of the Outcome for Alternative
The cost estimation consultant provided the following rough information:
- Selection Criteria
Expected Monterey Value would be used to select the best option and it will be shown in the tree of 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, we need to consider:
- 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 that is getting after performing Step 3 is the Expected Monetary Value. This value is positive for opportunities (positive risks) and negative for threats (negative risks).
- 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:
- Selection of the Preferred Alternative
From the above chart that shown the optimal option is to buying a ready house rather than buying the land and constructing the house. EMV does not mean the amount of money that would be used to buy a house
- 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 and its accuracy in order to make a correct decision.
- com, b. (n.d). Expected Monetary Value . Retrieved Septmeber 4, 2014, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.businessdictionary.com%2Fdefinition%2Fexpected-monetary-value.html&ei=8X0IVJGoDsPjaP-OgugJ&usg=AFQjCNFjf6_ZzPquvojyLf_O4Y8GNCp-pw&bvm=bv.74649129,d.bGQ
- com, b. (n.d). Expected Monetary Value . Retrieved Septmber 4, 2014, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CCwQFjAC&url=http%3A%2F%2Fwww.brighthubpm.com%2Frisk-management%2F48245-calculating-expected-monetary-value-emv%2F&ei=8X0IVJGoDsPjaP-OgugJ&usg=AFQjCNFQvrXJ3kELhxtGkZ3HtAG91Fkdyg&bvm=bv.74649129,d.bGQ
- edu, c. c. (n.d). Decision Tree. Retrieved septmeber 4, 2014, from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0CEAQFjAD&url=http%3A%2F%2Fwww.cs.cmu.edu%2Fafs%2Fcs%2Fproject%2Ftheo-20%2Fwww%2Fmlbook%2Fch3.pdf&ei=tX4IVL-KHcyXatq1gJAN&usg=AFQjCNFpz9PbAg3y_Yobqrvs9IPHH1WY0Q&bvm=bv.74649129,d.bGQ