Calculation for qualitative risk analysis?
Submitted by keane234 on Wed, 08/27/2014 - 01:40
Hi, does anyone know the calculation for following question?
question;
You are conducting a quantitative risk analysis on your project in relation to potential profits earned from a new product. The estimated profit is $350,000. There is a 20% chance that it will exceed expectations at a value of $180,000, there is a 50% chance it will meet expectations at a value of $40,000, and a 30% chance it will not meet expectations at a value of ($140,000). What is the expected monetary value of the risk?
Answer is $14,000.
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Wed, 08/27/2014 - 04:14
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Expected monetary value” (EMV
Expected monetary value” (EMV) – is a probability-weighted average of net present values of different outcomes. EMV is defined by determining probabilities of each distinct or “mutually exclusive” outcome and then weighting it with probability.
So mathematically if A is some alternative; P1, P2,... Pn, represent a set of possible outcomes of some uncertain variable; N1, N2, …, Nn represent the Values associated with each of the possible outcomes; and P(P1), P(P2), …, P(Pn) represent the probabilities of each of the outcomes, then the EMV is defined by:
EMV = P(P1)N1 + P(P2)N2 + … + P(Pn)Nn.
20% of $180K is 36K
50% of $40K is 20K
30% of $140K is -$42K ( Since its not meeting expectations)
36K + 20K - 42K = $14K