A. Project 1 has five bidders with equal chances of winning. Its value is $400,0
ID: 3917054 • Letter: A
Question
A. Project 1 has five bidders with equal chances of winning. Its value is $400,000, but will cost $20,000 to bid. What is its EMV? a. $80,000 b. $380,000 c. $64,000 d. Insufficient data B. Project 2 has 100 bidders with equal chances of winning. Its value is $26,000,000, but will cost $200,000 to bid. What is its EMV? a. $2,000 b. $62,000 c. $25,800,000 d. Insufficient data C. If he can only bid on one project, a risk-seeking manager will bid on which one? a. Project 1 b. Project 2 c. Insufficient data
Explanation / Answer
Answer: Expected monetary value (EMV) is a statistical technique used in risk management to measure risk, which in turn helps project managers calculate contingency reserves.
For project 1: answer is c) z464000 because winning probability is 0.2 and losing probability is 0.8 and when we win we gain the project of cost 400000 and on losing we lost 20000. now see the calculations:
EMV=(winning cost * winning probability) + (-losing cost *losing probability)
EMV = (400000*0.2) + (-20000*0.8) = $64000
For project 2 : answer is a) 62000$ because winning probability is 0.01 and losing probability is 0.99 and if we win we gain the project of cost 26000000 and on losing we lost 200000. now see the calculations:
EMV=(winning cost * winning probability) + (-losing cost *losing probability)
EMV= (26000000*0.01) + (-200000 * 0.99) = $62000
Risk-seeking manager will bid on both projects.
For provided constraint that he can bid for only one: He will bid for project 1, because It has better EMV than project 2.