In a decision tree analysis, a project manager is evaluating two options. Option A has a 60% chance of $100,000 profit and 40% chance of $20,000 loss. Option B has a 70% chance of $60,000 profit and 30% chance of $10,000 loss. Which option has the higher Expected Monetary Value (EMV)?

Question

Project Management (PMP) — Hard

In a decision tree analysis, a project manager is evaluating two options. Option A has a 60% chance of $100,000 profit and 40% chance of $20,000 loss. Option B has a 70% chance of $60,000 profit and 30% chance of $10,000 loss. Which option has the higher Expected Monetary Value (EMV)?

Accepted Answer

To determine the higher Expected Monetary Value (EMV), calculate the weighted average of each option. Option A's EMV is $52,000, derived from (0.6 * $100,000) + (0.4 * -$20,000). This exceeds Option B's EMV. Incorrect options misapply the EMV formula or miscalculate probabilities.