EMV PMP®: Your Guide to Expected Monetary Value Analysis
Making decisions can be a bit complicated when you have many variables to consider, especially with important ones that could impact your project and stakeholders. It is crucial to consider your options carefully, including risks, alternatives, and possible outcomes. Expected monetary value (EMV) analysis is an essential PMP exam tool for quantifying the impact of risk and determining what actions you should take, if necessary.
Follow this guide from your Project Management Academy experts about what you need to know about EMV for the PMP exam.
PMP® Exam Formula Cheat Sheet
Learn how to successfully use project management formulas after reading this cheat sheet.
Expected monetary value description
Projects are executed in uncertain environments with variables including budget, resources, scope, schedule, and more. Uncertainties lead to risks, but these risks can’t prevent you from making necessary project decisions. Quantifying these risks helps make decision-making easier.
An EMV analysis is one of two techniques used in quantitative risk analysis. This statistical concept considers all possible future outcomes to calculate the likely average outcome. With EMV analysis, PMP credential holders can choose the outcome with the highest value or smallest negative impact.
Think of EMV as a ballpark dollar figure that averages best- and worst-case scenarios to determine the potential monetary impact of a decision. It also accounts for the probability of an outcome occurring.
EMV PMP Exam formula
The formula used to calculate the EMV of an outcome is simple: EMV = P * I
You will need to account for the outcome’s probability (P) and impact (I) in this formula. The probability is usually a fraction or percentage, while the impact is typically a positive or negative monetary value.
The EMV PMP exam formula in its simplest form is a three-step process:
- Determine the probability (P) an outcome will occur.
- Determine the monetary value or impact (I) of the outcome.
- Multiply P x I to calculate the EMV.
If a scenario presents multiple potential outcomes, you need to calculate the EMV for each potential outcome and add them together to get the overall EMV.
What does this formula look like in action? Here’s a simple example. Let’s say you are deciding whether or not to purchase a tool that may help your project. The tool costs $10,000 and has a 70% chance of working. If it works, your project will net $15,000.
- If the tool works…
- Positive EMV = 70% x $15,000 = $10,500
- If the tool fails…
- Negative EMV = 30% x -$10,000 = -$3,000
- Overall EMV = $10,500 – $3,000 = $7,500
Typically, you should assume any option with a positive EMV is worth pursuing. Your project may also require you to choose between multiple options. Calculating and comparing the overall EMV for each potential scenario’s outcomes will allow you to select the best option.
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Pros and cons of EMV analysis
While EMV analysis is a useful PMP exam tool, you should keep the following pros and cons in mind:
- Pros of EMV analysis:
- The EMV formula is a straightforward calculation.
- The EMV value gives you a clear answer about which course of action to pursue.
- The process of calculating the EMV may help you identify minimizable risks.
- Cons of EMV analysis:
- Any inaccurate values regarding probability, impact, and risk can throw off your calculations significantly.
- Quantifying risks can be difficult and time-consuming. A risk probability and impact matrix may help you determine how significant or likely a risk is.
- Though the EMV formula is simple, your calculations will become more and more complex with larger projects and more variables or outcomes.
No project management tool is perfect, but using EMV analysis can make your decision-making process much more manageable.
EMV PMP Exam related topics
Whether or not you see EMV questions on the PMP exam, understanding the concept and how it can be used will help you succeed on the exam. Besides knowing how to calculate EMV and compare options, you should also understand decision tree analysis and probability distribution.
Decision tree analysis
One drawback to EMV analysis is multiple outcomes or variables can complicate your calculations. A decision tree analysis is a mathematical way to map out and evaluate all your options to decide which option brings the most value or provides the lowest risk to a project.
Decision trees should be read from left to right. It starts with a decision node, or a point at which you have to make a decision, and branches out to show the different outcomes and probabilities calculated using EMV analysis.
Let’s expand on the tool example from before. Instead of deciding whether or not to use a tool, say you are deciding between two tools that may help your project. First, lay out the facts:
- Tool A costs $10,000. There is a 70% chance it will succeed and a 30% chance it will fail.
- Tool B costs $5,000. There is a 25% chance it will succeed and a 75% chance it will fail.
- If the tool you buy works, your project will net $15,000.
Next, construct your decision tree:
You can see that the total EMV for Tool A is $7,500 ($10,500 – $3,000) while the total EMV for Tool B is -$2,500 ($1,250 – $3,750). Although Tool B costs less, its negative EMV indicates Tool A is the safer option with a better potential outcome.
PMP credential holders can use decision tree analysis to compare choices and make the best decision when managing or preparing for a project. Simply read the tree from left to right and follow the branches to complete the calculations.
Combining probability distribution with EMV
Decision trees are helpful when facing choices between multiple options, but they’re not sufficient for more complicated situations. The example above works because both options share enough comparable variables. A probability distribution allows project managers to consider a broader range of possible variables and outcomes. Probability distributions typically require a sophisticated computer model to see the probabilities of achieving specific target points.
The Project Management Institute gives the probability distribution example of an expensive software package that could cut down the time needed for a costly team to complete a task. Combining probability distribution with EMV allows you to consider the range of possible outcomes produced by purchasing the software, such as reducing the amount of time needed.
Working with probabilities in combination with EMVs will help you develop a range of possible outcomes so you get the complete picture of what could potentially result from your decision.
EMV sample questions for PMP Exam
Let’s test your understanding of EMV analysis with some sample PMP exam questions. Make sure to check your answers at the bottom of the page!
|You are working with the project manager for a construction project. One of the identified risks within the project has a 20 percent chance of happening. If the risk occurs, it will cost your project an additional $150,000. What is the EMV for this risk event?||$150,000||$30,000||$75,000||Zero; the risk is not real until it occurs|
|You are managing a graphic design and print project. There is a 30% chance that the paper you are using will be too thin and you’ll have to reprint the presentation, which will cost you an extra $5,000. There is also a 20% chance that the high-capacity ink cartridges you are using will last you longer than you expect, which will save you $1,000. What is your Expected Monetary Value (EMV)?||$4,000||$200||($1,300)||($1,500)|
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- B. The risk has a 20 percent chance of happening and will cost the project $150,000 if it does. Twenty percent of $150,000 is $30,000.
- C. EMV is calculated by taking event #1 with a loss of $5,000 and multiplying it by the 30% probability to get negative $1,500. For event #2, you multiply the savings of $1,000 times the 20% probability to get positive $200. Add the two events and you get -$1,300.
We hope this guide was helpful to your understanding of EMV analysis for the PMP Exam. Don’t forget to let us know if you have further questions. If you have not enrolled in our PMP Certification Training boot camp course yet, we invite you to register to access all the knowledge, tools, and resources you need to take the PMP exam and the next step in your career.