You are evaluating the risks associated with a construction project. Through careful analysis you have developed a list of the following risks, probabilities those risks will happen, and the costs associated with them if they occur.

25% chance of Snowmaggedon which will delay the project at a cost of $35,000
10% chance of cost of construction materials dropping saving the project $70,000
10% probability a labor strike will occur delaying the schedule with a cost of $40,000
80% chance of new regulations mandated calling for higher inspection standards which will cost an additional $15,000 to mitigate
What is the EMV of this project?

The problem states that there is a 25% chance of Snowmaggedon which will delay the project at a cost of $35,000. Since this is a cost, [tex]P_{1}[/tex] is negative.

[tex]P_{1} = 0.25*(-35,000) = -8,750[/tex]

There is a 10% chance of cost of construction materials dropping saving the project $70,000. A saving is an earning, so [tex]P_{2}[/tex] is positive

[tex]P_{2} = 0.10*70,000 = 7,000[/tex]

There is a 10% probability a labor strike will occur delaying the schedule with a cost of $40,000.

[tex]P_{3} = 0.10*(-40,000) = -4,000[/tex]

There is a 80% chance of new regulations mandated calling for higher inspection standards which will cost an additional $15,000 to mitigate

[tex]P_{4} = 0.80*(-15,000) = -12,000[/tex]

[tex]EMV = P_{1} + P_{2} + P_{3} + P_{4} = -8,750 + 7,000 - 4,000 - 12,000 = -17,500[/tex]

The EMV of this project is -17,500