EMV Question
Submitted by hirenonweb on Thu, 06/09/2011 - 08:35
Product A can be manufactured by revising and updating existing toy. The initial cost is exptected to be $ 150000. 40% chance that existing equip can be used w/o modification. for manufacturing the new toy. 60% probab that the company will need to spend another $100,000 to modify the equipment to manufacture new toy.
Product B is a totally new idea with an estimated cost of $ 250,000. 70% probability of using the existing equipement w/o modification and 30% prob that the equip must be modified at an additional cost of $ 100,000
Which product offers less risk?
1. Neither
2. Not enough data
3. Prod A
4. Prod B
Please give the correct answer with calculations.
Forums:
rahul178
Thu, 06/09/2011 - 12:05
Permalink
Project A
This is what i think and i may be completely wrong.
Project A
OC: 150000*40% = 60000
Risk: 100000*60% = -60000
EMV = 0
Project B
OC: 250000*70% = 175000
Risk: 100000*30% = - 30000
EMV= 145000
So as question is about least Risk... Project A has no gain no loss ...
Extreamly sorry if i am totally wrong with calculation or answer.
rsang
Thu, 06/09/2011 - 12:31
Permalink
B is at more risk
Lets calculate:
Product A:
150000 X .4 = 60000
100,000 x .6 = 60000
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Risk of Spending additional cost = 60000 - 60000 = 0
Product B:
250,000 X .7 = 175000
100,000 X .3 = 30000
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Risk of Spending additional cost = 175000 - 30000 = 145000
Assuming need to use addition cost = more risk, answer should be B
rishiarien
Tue, 06/14/2011 - 10:21
Permalink
Project B
Please note that this is NOT a EMV question. An EMV question would typically have the rewards and the penalties associated with Proablities of their occurance. The EMV helps select a project based on these benefits and penalties.
Here the case is simply of identifying the risk involved
Risk= Probability x Impact
For Project A:
Risk= 0.6 x 100000= 60000
For Project B
Risk=0.3 x 100000= 30000
Project B offers less risk.