A system integration carries a 35% chance of requiring $600,000 rework. What is the Expected Monetary Value (EMV) of this risk?

Question

BlackTom AI · Accepted Answer

First, let's identify the essential numbers in the problem: the probability of the risk event is 0.35 (35%), and the monetary impact if the risk occurs is $600,000. EMV is calculated by multiplying the probability of the event by the financial consequence if it occurs.

Option 1: $390,000. This value would imply a calculation like 0.65 * 600,000 or some other combination that doesn't reflect the given probability. Since the probability is 0.35, this result doesn’t align with standard EMV computation, so it’s not consistent with the data provided.

Option 2: $600,000. This would correspond to assuming the risk occurs with certainty (probability 1) or ignoring the probability. EMV requires multiplying the probability by the impact, so this overstates the expected value given a 0.35 chance.

Option 3: $1,200,000. This would arise if you multiplied 0.35 by a much larger figure (e.g., 3,429, or by misapplying formula). It’s not compatible with the stated impact of $600,000 per event, and it exaggerated the expected loss beyond reasonable EMV for a single event.

Option 4: $210,000. This matches the EMV formula: 0.35 × $600,000 = $210,000. It represents the average expected loss per project if this risk could occur repeatedly over many similar projects, averaged over time.

In summary, the correct approach is to apply EMV = probability × impact, which yields $210,000. The other options reflect misunderstandings such as ignoring probability, overestimating due to multiplication mistakes, or applying an incorrect baseline. The key concept is that EMV accounts for both the likelihood of the event and its financial consequence, not just the full amount or an arbitrary number.

A system integration carries a 35% chance of requiring $600,000 rework. What is the Expected Monetary Value (EMV) of this risk?单项选择题

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