What is the expected monetary value?

•        What is the expected monetary value?

It is a financial measure used when measuring future uncertainty. It is defined as the summation of the value of each outcome in dollars ($), weighted by the probability of that outcome. For example, consider a project that needs to be redesigned, and assume that the new approach involves some risk to accomplish this goal. One possible monetary outcome is $200,000 with a 40 percent probability of achieving this outcome, while another monetary outcome is $150,000 with a 60 percent probability of occurrence. The EMV of this project is

•        EMV = $200,00 ∗ 0.4 + $150,000 ∗ 0.6 = $170,000

•        Use of Functions

▫        Critical Success Factor

A project’s net return and risks are the two pivotal factors that determine

its ultimate success and the value it delivers. In the absence of thorough

risk assessment and proactive risk management at the valuation and

implementation stages, project success cannot be achieved.18

A simple example will serve to illustrate the importance of risk assessment

and risk management to project value. Let us consider a project

proposal with an expected gross return of $200,000 over five years, with

a cost of $150,000 to implement. Without factoring any risks into the

equation, the net return is $50,000 ($200,000 − $150,000). However,

risks to a project are inevitable, and this hypothetical project is no exception.

Therefore, let us assume the following risks and their impact on this

project:

1. There exists some uncertainty in the project requirements and

there is 40 percent probability that development efforts will cost

an additional $30,000. This will reduce the net return by $12,000

($30,000 ∗ 0.4).

2. The project team believes that there is 20 percent likelihood that

additional sales force training may be required. This will likely

reduce the net return by $10,000 ($50,000 ∗ 0.2).

3. There is a 10 percent probability that the entire project could fail or be

superseded by other projects because of technological uncertainties

or a strategic change in direction. This implies a net reduction of

$5,000 ($50,000 ∗ 0.1) in the project’s expected net return.

When the impact of all of the above risks is factored into account, the

reduction in the net return to the project is $27,000 ($12,000 + $10,000

+ $5,000), and the overall net return from the project now is $23,000

($50,000 − $27,000). The project is now considerably less attractive than

it originally appeared.