Decision Tree & calculating Expected Monetary Value Questions & Answers:

Question No. 1
If a risk event has a 90 percent chance of occurring, and the consequences will be US $ 10,000, what does US $9,000
represent?
A. Risk value
B. Present value
C. Expected monetary value
D. Contingency budget
Answer: C

Explanation: EMV (Expected monetary value) = .9 X $ 10,000 = $ 9, 000

Question No. 2
What is the difference between expected monetary value and net present value.
A. Expected monetary value is the probability times impact of an opportunity and net present value is the benefit
less costs over many time periods.
B. Expected monetary value is the value it takes to recover your investment and net present value is the value of
money.
C. Expected monetary value is the estimated value of work actually accomplished and net present value is the value
of the work to be done.
D. Expected monetary value is the estimated value of the risk response plan and net present value helps to
determine the value of investment.
Answer: A

Explanation: Expected monetary value is used in risk management, but it is not the estimated value of risk
response plans. Expected monetary value is the probability times impact of an opportunity, and net present value
is the benefits less costs over many time periods.
Question No. 3

A project has a 60% chance of a $100,000 profit and a 40 percent of a US $100,000 loss. The Expected Monetary Value for the
project is:
A. $100,000 profit

B. $60,000 loss

C. $ 20,000 profit

D. $40,000 loss
Answer: C

Explanation: Expected Monitory Value (EMV) is computed by EMV = Probability × Impact.

Compute both positive and negative values and then add them:
0.6 × $100,000 = $60,000
0.4 × $100,000 = $40,000
EMV = $60,000 - $40,000 = $20,000 profit
Question No. 4

If the cost of insurance is $10,000, the value of the property is $100,000, and the probability of loss is ten percent, then the
insurance is.

a) The same as the cost of the probable loss and there is no advantage
b) Desirable because it will cost less than the probable losses
c) Undesirable because it costs more than the probable losses
d) None of the above
Answer: A

Explanation: EMV = 10% x 100,000 = 10,000 (probable loss value) which is exactly equal to insurance cost, so there is
no advantage.
Question No. 5

A project is facing the following risks, a 20% chance a part is not available, creating an additional fee of US $ 30,000; 10%
chance the team require additional training for a cost of US $ 12,000; 25% chance the second planned quality test costing
US $ 80,000 is unnecessary. What is the expected monetary value of these risks?

A. US $ 50,000
B. US $ 42,000
C. US $ 72,000
D. US $ 5,200
Answer: D

Explanation: Expected monetary value is probability times impact. Take into account all risks including positive ones. The
calculation is: (0.2 x $30,000) + (0.1 x $12,000) - (0.25 x $8,000) = $ 5,200
Question No. 6

A project have the following risks: 5% probability of an additional acceptance test resulting in a 3 week delay, 50%
probability the next software release will not be ready by the due date resulting in an 8 week delay, 30% probability an
expert resource will become available, shortening the duration of activity C by 4 weeks.
What is the expected monetary value?
A. 84.23 days
B. 29.05 days
C. 20.65 days
D. 77 days
Answer: C

Explanation: The expected monetary value takes into account the probability and the impact. The calculation is: (0.05 x 21)
+ (0.5 x 56) - (0.3 x 28) The last part is subtracted because it represents an opportunity and should be balanced against the
threat.
Question No. 7

While preparing risk responses, you identify new risks. what should you do:
A. Document the new risks and calculate the expected monetary value base on the probability and impact of
occurrence.
B. Add reserves to the project to accommodate the new risks and notify the management.
C. Add 10% contingency to the project budget and notify the customer.
D. Determine the risk events and associated costs, then add the cost to the project budget as a reserve.
Answer: A

Explanation: When new risks are identified, they should go through the risk management process. You need to determine
the probability and impact of the risks and then try to diminish them through the Plan Risk Responses process. Only after
these efforts should you consider adding reserves for time and/or cost. Any reserves should be based on a detailed
analysis of risk. Calculating the expected monetary value of the risks is an important part of the risk management process,
and the best choice presented here.
Question No. 8

What is the purpose of the decision tree?

A. It takes into account future events for today choices.
B. It calculates the probability of an outcome.
C. It demonstrates the path of events in a project.
D. It determine what events may take place.
Answer: A

Explanation: A decision tree allows you to make an informed decision today based on probability and impact
analysis. You can decide based on the expected monetary value of each of your options.
Question No. 9

There is probability of 0.1 a given risk will occur in a project. If it occurs, it will result in a loss of US $ 10,000. The insurance
cost for this event is US $ 700 with a deductible amount of US $ 250. Should the project manager buy this insurance?
A. Yes, since $1000 > $950
B. No, since $1250 > $1000
C. No, deductible amount changes the expected monetary value of the risk event.
D. Since, $1000 > $700
Answer: A

Explanation: EMV = P x I. In this case, expected monetary value is 0.1 x $10,000, = $1,000. The insurance cost plus
the deductible amount are less than the expected monetary value of the risk event.
Question No. 10

A project has a schedule reserve of 33 days when the customer adds scope not previously planned for. The change has a
40% chance of delaying the project by 14days. What should be done?
A. Add more resources to the project.
B. Add 5.6 days to the schedule reserve.
C. Plan to add 14 days of overtime to the project.
D. Look for ways to cut 14 days of work from another activity.
Answer: B

Explanation: Overtime is never one of the first options in project management because there are many other ways
to handle such problems. Many people select cutting 14 days from the schedule, but reread the question. You would
not look for ways to cut 14 days. The expected monetary value of the new risk event is only 5.6 days (40 percent x 14
days = 5.6). A reserve is designed to cover specific risk events previously identified and measured in the risk
management process. The only viable choice is to add 5.6 days to the schedule reserve.
Question No. 11
What is the expected monetary value of the decision displayed in the chart?

A. $4
B. $200
C. $500
D. $10
Answer: A

Explanation: The expected monetary value is probability times impact. In this case you multiply the probabilities
together and then multiply the impact. 0.20 x 0.10 x 0.20 x $1000 = $4.
Question No. 12
You are developing a revolutionary new product for the telecom industry. It is a switching product that provides voice, video
and data over the same pipeline, but uses a technology that has never been tried before. The potential return on
investment for this product is $5 billion. Your estimated development costs are $150 million. If you go it alone, there is a
65% chance that you will succeed. You also decide to look into developing the product with a partner that has specific
experience with this new technology. With a partner, there is an 85% chance that you will succeed, but development costs
in this case are $250 million, of which the partner is carrying $50 million. Because you are shouldering 80% development
costs, you decide to split the ROI with 80% going to you and 20% going to the partner if the project succeeds.
What is the best EMV scenario from your organization’s point of view?

A. Build the solution alone for $3.25 billion in potential return.

B. Build with a partner with a $4.25 billion in potential return
C. Build with a partner with a $3.37 billion in potential return
D. Build the solution alone for $3.35 billion in potential return
Answer: C

Explanation: The decision branch for going it alone computes as follows: 65% of $5 billion = $3.25 billion. 35% of $150
million = $52.5 million. The EMV equals 65% of the ROI minus 35% of the potential failure costs, or $3.25 billion - $52.5
million = $3,197,500,000. The decision branch for sharing the development with a partner computes as follows: 85% of
$5 billion = $4.25 billion. 15% of the $250 million development costs = $37.5 million. $4.25 billion - $37.5 million =
$4,212,500,000. Your share of the ROI is 80% of the $4.212,500,000 or $3.37 Billion. All in all, developing with a partner
gets you a higher return on investment.
Question No. 13
In your new project the objective is to develop a new drug. After doing financial analysis, your finance manager provided you
with these statistics:

30% probability of success with benefits of $700,000

70% probability of failure with loss of $300,000
Based on this information, you:

A. Suggest that the project should proceed.

B. Suggest that the project should be stopped.
C. Communicate to your senior management that you cannot take a decision whether to proceed with the project or not.
D. Start working on the project and ask your finance manager for additional information.
Answer: C

Explanation: Expected Value of the project = Expected Value of success (0.30 x $700,000) + Expected value of Failure
[0.70 x (- $300,000)] = $210,000 - $210,000 = 0 Since the Expected Value is "0", you cannot take a decision whether to
continue with the project or not.
Question No. 14

This analysis technique is a statistical concept that calculates the average outcome when the future includes scenarios that
may or may not happen:
 
A.           Earned value analysis
B.           Delphi technique
C.           Qualitative risk analysis
D.           Expected monetary value analysis
 
 
Answer:   D
Expected monetary value (EMV) analysis calculates the average outcome when the future
includes scenarios that may or may not happen.
Question No. 15
You are managing a software engineering project, when two team members come to you with a conflict. The
lead developer has identified an important project risk: you have a subcontractor that may not deliver on
time. The team estimates that there is a 40% chance that the subcontractor will fail to deliver. If that
happens, it will cost an additional $15,250 to pay your engineers to rewrite the work, and the delay will cost
the company $20,000 in lost business. Another team member points out an opportunity to save money an
another area to offset the risk: if an existing component can be adapted, it will save the project $4,500
in engineering costs. There is a 65% probability that the team can take advantage of that opportunity. What
is the expected monetary value (EMV) of these two things?
A. - $14,100
B. $6,100
C. - $11,175
D. $39, 750
 
Answer: C

Explanation: As cost of threat is negative and the cost of opportunity is positive, to calculate the expected monetary value
(EMV) of a set of risks and opportunities, multiply
each probability by its total cost and add them together. In this question, the cost of the risk
is -$15,250 + -$20,000 = -$35,250, so its EMV is 40% x -$35,250 = -$14,100. The value of the
opportunity is $4,500 and its probability is 65%, so its EMV is 65% x $4,500 = $2,925. So the
total EMV for the two is -$14,100 + $2,925 = -$11,175
Question No. 16
A company is trying to determine if prototyping is worthwhile on the project. They have come up with the following
impacts (see the diagram below) of whether the equipment works or fails. Based on the information provided in the
diagram, what is the expected monetary value of each option? Which is the cheaper option-to prototype or not to
prototype?
 

 
A. Prototype
B. Do not prototype
C. Both have same value
D. Information is not enough
Answer: A
 
Explanation: EMV of prototype: 35% x $120,000 =$42,000, and add setup cost $42,000 + $200,000 =$242,000 and EMV
of without prototype: 70% x $450,000 =$315,000. Cost of prototype is less so decision of prototype is cheaper.
Question No. 17
You need to fly from one city to another. You can take airline A or B. Considering the data in the diagram provided, which
airline should you take ?
 
 

 
A. Airline A
B. Airline B
C. Both have same value
D. Information is not enough
Answer: A
 
Explanation: If you just look at the cost of the airfare, you would choose airline B
because it is cheaper. However, the airlines have different on-lime -arrival rates. If
the on -time-arrival rate for airline A is 90 percent, it must be late 10 percent of the
time so expected monetary value be (10% x $4,000) + $900 = $1300
. Airline B is on time 70 percent of the time, and is therefore late 30 percent of
the time. We have a $4,000 impact for being late, so EMV of airline B is (30% x $4,000) + $300 = $1500. The result is that you
should choose airline A.