EMV Calculation: Clarification needed

Discussion in 'PMP' started by Deepti Bhattacharya, Sep 9, 2020.

  1. Deepti Bhattacharya

    Deepti Bhattacharya Active Member

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    You are a project manager evaluating a decision to buy a licensed software tool. This tool has a 50% chance of being successfully implemented in your company and would cost $50,000. However, there is a 40% chance that your company would be able to save $150,000 due to improved productivity. What is the expected monetary value of this decision?

    The expected monetary value for a project is calculated by subtracting expenses from savings. In this case, Savings = 0.4 * $150,000 = $60,000 and Expenses = 0.5* $50,000 = $25,000. So, EMV = $60,000- $25,000 = + $35,000.

    Need understanding on how expenses is considered as 0.5*50000...
    The implementation cost according to me would be 50k irrespective of it being successful or not, how can we assume if it is successfully implemented cost would be 25k?
     
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  2. MAHESH TANAJI SANKPAL

    MAHESH TANAJI SANKPAL Active Member

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    What are the options given and what is the correct answer?

    My EMV = -50,000 + 0.5 (0.4 * 150,000) = -20,000
    So its better not to buy and implement the software tool !!!!
    This is based on the below decision tree and something is seriously wrong with my understanding.

    Let me know how you got your EMV.

    upload_2020-9-11_13-35-51.png
     
    #2
    gautam_kaistha likes this.
  3. gautam_kaistha

    gautam_kaistha Well-Known Member

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    there are two nodes.. failure and success.. if success gain is 60,000 as calculated correctly. Probability of failure is 50% means 50,000* 50% i.e 25,000, If you gain, you gain 60,000 if you loose, you loose 25,000 so +35000 is the correct option

    In the diagram, impact of buy is taken as 0 which i think should be 50,000 as you buy and cant use it.
     
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  4. Support Simplilearn(4685)

    Staff Member Alumni

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    @tim jerome
    Hi Mr.Tim,

    Kindly assist on this
     
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  5. tim jerome

    tim jerome Well-Known Member
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    "This tool has a 50% chance of being successfully implemented in your company and would cost $50,000."
    We have a 50% chance of incurring a cost of $50k.
    EMV = .5*impact, or $25k.
    That 50% chance is successful implementation. It's assumed that there is
    no cost if there is no implementation.

    If there was a cost regardless of whether it were implemented or not, you would see a 100% probability of a $50k cost.
     
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