expected monetary value (EMV)
An estimate of an uncertain outcome stated in monetary units, typically computed as the probability-weighted average of all possible results.
Key Points
- Represents the probability-weighted dollar value of uncertain outcomes.
- Positive EMV reflects expected benefits; negative EMV reflects expected costs.
- Commonly used in decision tree analysis and quantitative risk analysis.
- Summing individual risk EMVs gives the overall expected impact for reserves and forecasts.
Example
A project has a 30% chance of a $50,000 cost overrun (threat) and a 20% chance of a $40,000 savings (opportunity). EMV(threat) = 0.30 x -50,000 = -15,000; EMV(opportunity) = 0.20 x 40,000 = 8,000. Net EMV = -7,000, which the PM may use to set part of the contingency reserve.
PMP Example Question
A project faces two risks: Risk 1 has a 25% chance of a $120,000 cost overrun; Risk 2 has a 40% chance of a $50,000 savings. What is the overall EMV for the project?
- -$30,000
- -$10,000
- $8,000
- -$5,000
Correct Answer: B — Net EMV is -$10,000
Explanation: EMV = (0.25 x -120,000) + (0.40 x 50,000) = -30,000 + 20,000 = -10,000.
