Why (-) in gain - Risk Question?
Submitted by Jewahir on Tue, 07/09/2013 - 01:19
Q1) you are a project for a major telecommunication network with a NPV 10,000,000US. You are heavily dependent on third party for your project and your contract office inform you that there is a chance of 30% that the vendor will go out of business at the end of the quarter. if that occurs, your project will incur a US 3,000,000 cost overrun due to rework. Theres also 30 percent chance that a new legislation will pass that will decrease government oversight of your team's work. If this legislation passes, you estimate that your project will save US 1,600,000 in time delays. Lastly, your technical lead indicates that there is 20% chance that a new software package will be available by month end that could save US 1,800,000 in testing time. If available, the software will cost US500,000 to procure, install and train. What is the total EMV of these three risk events?
Answer is US 160,000
But what is confusing me is why we use 1800000 as (-) and 500000 as (+), since we should use the + for gain and - for loss ?? Please explain it to me as I don't want to get it wrong in the exam.. Appreciated,
Forums:


barora@gmail.com
Tue, 07/09/2013 - 03:18
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USD -160,000
1. (-ve Risk) - Vendor goes out of business
0.3 X 3,000,000 = 900,000
2. (+ve Risk) - New legislation comes into effect
0.3 X 1,600,000 = 480,000
3. (Overall +ve Risk) - Testing time savings because of the software but the software will cost
0.2 X (1,800,000 - 500,000) = 260,000
Overall EMV = -900,000 + 480,000 + 260,000
= -160,000
Jewahir
Tue, 07/09/2013 - 18:53
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Thanks so make sense
Thanks so make sense
bkthakkar
Wed, 07/10/2013 - 11:40
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The above calculation is
The above calculation is correct
Irrelevant info like NPV and Cost of the Software included in the question is provided to divert the attention. We have to be aware of this twists while answering PMP exams