Project Management Course Expected Monetary Value EMV Universidade do Vale do Itajaí University of Vale do Itajaí Univali Incremental Tecnologia English version

1. marcello.thiry@gmail.comExpected Monetary Value (EMV)
Project Management Series

2. Sandra is the Project Manager
in a small software company
Once her team is small, all
members always work on a
single project at a time

3. Today, Sandra has a problem
to solve
She has to choose one
between two projects
candidates:
Customers
Helpdesk

4. Which project will
bring more return to
the organization?

5. marcello.thiry@gmail.com
We can
estimate the
expected
return of each
project!

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Easy decision

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Easy decision

8. But and if we
consider risks?

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Decision needs to
consider multiple paths

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Where...

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Probability of
occurrence of
the risk
x
Estimated value
of the risk
Calculating the expected monetary value
of each risk...
Expected
Monetary
Value (EMV)
of the risk
=

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Monetary value of
the impact
of the risk
Positive = opportunity
Negative = threat
Probability of
occurrence of
the risk
x
Estimated value
of the risk
Expected
Monetary
Value (EMV)
of the risk
=

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EMV of the riski
To calculate the Project’s EMV...
Project’s EMV =
…

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Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?
Is it what we
will earn from
each project?
NO

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If each project were executed many
times, in the very same conditions…
Probable average return
of each execution
Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?

17. marcello.thiry@gmail.com
It helps to estimate
Contingency reserves
Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?
More used in larger projects (large number
of risks)

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The difficulty is in
appropriately quantify
the value of the impact
But there is
no magic!

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Limitations…
– Definition of the value of the impact can be
subjective or biased
– Decision should consider the variance
– Large variation between earns and losses can
affect decision makers

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Limitations…
(DAVIES & LAM, 2001)
– Will you accept a 50/50 bet for $5?
Probably YES
– Will you accept a 50/50 bet for $5m?
Probably NO
– BUT BOTH HAVE AN EMV = 0!
– In some way you ‘care’ more about losing
$5m than winning $5m

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Limitations…
(DAVIES & LAM, 2001)
– Your house is worth $200,000
– The probability of destruction by fire is
1/10,000
– EMV of the loss = $20
– So $20 is the most you will pay for
insurance?
– NO, YOU CARE MORE ABOUT THE CHANCE OF
LOSING YOUR HOUSE

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Risk #1: The software designer will be transferred to other
project.
• Probability = 30%
• Substitution cost = $12,000.00 (threat, negative impact)
• EMV = 0.3 x 12,000.00 = $-3,600.00
Revisiting...
Project XPTO
Total cost: $300,000.00

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Risk #2: New approved legislation.
• Probability = 50%
• Modification cost = $20,000.00 (threat, negative impact)
• EMV = 0.5 x 20,000.00 = $-10,000.00
Revisiting...
Project XPTO
Total cost: $300,000.00

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Revisiting...
Risk #3: Current version of the framework already attends the
project.
• Probability = 60%
• Work reduction = $5,000.00 (opportunity, positive impact)
• EMV = 0.6 x 5,000.00 = $+3,000.00
Project XPTO
Total cost: $300,000.00

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Take also a look at…
 (DAVIES & LAM, 2001). Managerial Economics: An Analysis of Business Issues. 3rd ed. FT Prentice-
Hall.
 (HAIMES, 2015). Risk Modeling, Assessment, and Management. 4th ed. Wiley.
 (KENDRICK, 2015). Identifying and Managing Project Risk: Essential Tools for Failure-Proofing
Your Project. 3rd ed. AMACOM.
 (PMBOK, 2013). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). 5th ed.
Project Management Institute (PMI).
 (TALEB, 2010). The Black Swan: The Impact of the Highly Improbable Fragility. 2nd ed. Random
House.