What is Expected Monetary Value (EMV) in project management?

Expected Monetary Value (EMV) is a quantitative risk analysis technique that calculates the average outcome of a decision by multiplying the probability of each scenario by its financial impact and summing the results. Positive EMV indicates an opportunity; negative EMV indicates a threat.

How do you calculate EMV using a decision tree?

To calculate EMV using a decision tree: (1) Identify all decision alternatives, (2) For each alternative, identify possible outcomes and their probabilities, (3) Calculate the monetary value of each outcome (revenue minus cost), (4) Multiply each outcome by its probability, (5) Sum all weighted outcomes for each alternative. Choose the alternative with the highest EMV.

What is the difference between EMV and EVM in project management?

EMV (Expected Monetary Value) is a risk analysis technique used to evaluate decisions under uncertainty by calculating probability-weighted outcomes. EVM (Earned Value Management) is a project performance measurement technique that compares planned work vs actual work vs costs to assess project health. Despite similar acronyms, they serve completely different purposes.

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Risk

Expected Monetary Value (EMV)

A simplified explanation of expected monetary value (EMV) using a decision tree

Decision trees are used to support selection of the best of several alternative courses of action. This technique calculates the profit or loss of an outcome (such as a project) based on different scenarios, by taking into consideration the probability of occurrence and the expected profit or loss from each scenario. This profit or loss of the outcome is termed as the Expected Monetary Value (EMV).

Opportunities: Positive EMV
Threats: Negative EMV

Let's understand this concept with the help of an example.

Fitkit Inc., a technology company, is considering development of a new fitness tracking product. It has two candidates to choose from - Product X and Product Y. Product X will require an investment of $80 million, while Product Y will require $100M. According to company's prediction, the chances of strong, moderate, and weak demand are 30%, 50% and 20% respectively. The table below shows the revenue for the three demand scenarios. Figures are in million dollars. Which product should the company choose, and what is the Expected Monetary Value (EMV) of their decision?

Product	Investment	Demand
Product	Investment	Strong	Moderate	Weak
Product X	80	120	100	80
Product Y	100	160	120	80

This problem can be solved with the help of a decision tree analysis.

Starting from the left, we first draw a decision box showing the two decisions. From the decision box, we draw a decision node with two branches representing the two decisions - Product X ($80) and Product Y ($100m).

From each decision, we draw a chance node with three branches representing the three demand scenarios - Strong, Moderate, and Weak.

Product X

Strong demand

The expected return in case of a strong demand is $120m. Given that the investment is $80m, the return would be $40m (= $120m - $80m). But the probability of a strong demand is only 30%. Therefore, the value of this node is 30% of $40m, or $12m (= 0.3 x $40m).

Moderate demand

The expected return in case of a moderate demand is $100m. Given that the investment is $80m, the return would be $20m (= $100m - $80m). The probability of a moderate demand is 50%. Therefore, the value of this node is 50% of $20m, or $10m (= 0.5 x $20m).

Weak demand

The expected return in case of a weak demand is $80m. Given that the investment is $80m, the return would be zero (= $80m - $80m). There's no need to multiple it with the probability as anything multiplied by zero is zero.

Now, if we sum up the values of the three demand scenarios, we get the EMV of going with Product X i.e. $22m (= $12 + $10 + $0).

Product Y

Strong demand

The expected return in case of a strong demand is $160m. Given that the investment is $100m, the return would be $60m (= $160m - $100m). But the probability of a strong demand is only 30%. Therefore, the value of this node is 30% of $60m, or $18m (= 0.3 x $60m).

Moderate demand

The expected return in case of a moderate demand is $120m. Given that the investment is $100m, the return would be $20m (= $120m - $100m). The probability of a moderate demand is 50%. Therefore, the value of this node is 50% of $20m, or $10m (= 0.5 x $20m).

Weak demand

The expected return in case of a weak demand is $80m. Given that the investment is $100m, the return would be -$20m (= $80m - $100m). The probability of a weak demand is 20%. Therefore, the value of this node is 20% of -$20m, or -$4m (= 0.2 x -$20m).

Now, if we sum up the values of the three demand scenarios, we get the EMV of going with Product Y i.e. $24m (= $18 + $10 + -$4).

In summary, FitKit Inc. should go with Product Y and the EMV of their decision is $24m.

The final solution is shown in the image below.