EMV Calculator – Expected Monetary Value
This EMV calculator helps you to compute the expected monetary value or cost of a risk to your project budget decision. If you're working with a budget, you know it's always good to have backup funds if things don't go as planned. EMV helps you determine the amount you'll need as backup or contingency reserve by quantifying the risks confronting your budget in monetary terms.
You can also evaluate the cost of a decision or several decisions before choosing to go ahead with it using the concept of an EMV to mitigate any chance of failure or success. This article addresses how to calculate EMV, the EMV formula, and use the expected monetary value calculator to develop a contingency reserve for your project.
What is EMV?
Expected Monetary Value (EMV) is a project management metric used in risk analysis for determining the overall contingency reserve required for a project plan.
When you make a plan, it can go better or worse than you expected. You can use the expected monetary value calculator to compute the cost of the best- and worst-case scenarios to arrive at an average cost, which is the amount you'll need to cover the relative risks to your investment.
A risk that'll positively impact your project is an opportunity – with positive value (best-case scenario).
A risk that'll negatively impact your project is a threat – with negative value (worst-case scenario).
EMV uses the probability and impact of the risk occurring to quantify the risks.
- Probability is the likelihood of the identified risk to occur; while
- Impact is the amount that you'll spend if the risk occurs.
Assuming you're constructing an electrified fence for an animal farm, and you have information that one in every ten energizers goes bad during installation. That means there is a 1/10 = 10% probability your energizer can go bad, and you'll need to buy another. If the cost of an energizer is $70, that is the impact on your construction project.
How to calculate EMV? – Expected Monetary Value formula
We can estimate the expected monetary value (EMV) by multiplying the probability of a risk event occurring by its impact value. We can write the expected monetary value formula as:
EMV = Probability of occurrence * Impact of occurrence
Let's consider the following EMV, a computational example on how to calculate the expected monetary value in project management and decision-making.
EMV calculation example
Let's say you're planning a pizza party on a tight budget, and you've identified three main risks to the event:
- More people showing up than you invited, and you'll need to buy more pizzas and drinks.
- A photo booth you booked failing to work during the event, and you'll have to get a refund.
- Not enough people showing up, and you'll need to return some drinks.
Risk 1 will require you to spend more, and you can consider it a threat to your budget. However, risks 2 and 3, although maybe unpleasant situations, will reduce your budget spend. You can apply the EMV formula to plan a contingency reserve.
Risk | Probability | Impact ($) | EMV ($) |
---|---|---|---|
1 | 30% | -300 | -90 |
2 | 10% | 100 | 10 |
3 | 15% | 120 | 18 |
-80 | -62 |
The expected monetary value of all three events is -$62. That means the extra money you need to add to your budget as a contingency reserve to cover the project risks is $62.
Pros and Cons of the EMV technique
Pros:
- EMV helps project planners calculate the contingency reserve to manage costs and risks.
- It helps you in deciding between different choices by providing monetary values to the options.
- It is a cheap way to evaluate risks using historical data.
- The expected monetary value calculator provides the average outcome of all identified risks.
Cons:
- EMV technique accuracy is limited to large projects and not recommended for small and medium-sized projects.
- It relies on expert opinions and historical data to decide the probability and impact of a risk. Hence, it's subjective and can have biased results.
- Identifying the positive risks (opportunities) is just as important as the negative risks (threats) to arrive at the right outcome for the EMV.
FAQ
How do I calculate EMV?
You can determine the EMV of an identified risk by multiplying the probability of a risk event occurring by its impact value.
EMV = Probability of occurrence × Impact of occurrence
How to calculate the expected monetary value in project management?
To evaluate the expected monetary value:
- Identify all the risks confronting the project.
- Determine the probability and impact of each risk (opportunities and threats) based on data.
- Calculate the EMV for each risk and sum up the EMVs to get the average EMV or contingency reserve for your project.
Is the EMV a reliable metric?
It depends. The EMV is only as reliable as the historical data it is based on. If you have accurate data to inform your probability and impact evaluation, there is a good chance that your EMV outcome will be sufficient.
Can you use the expected monetary value calculator in decision-making?
Yes. If you have to choose between different options for a project with identified risks, use the EMV calculator to determine the EMV of each risk. The risk path with the lowest EMV is likely the best option.