Expected Monetary Value (EMV)

Expected monetary value (EMV) is a statistical technique in risk management that is

used to quantify the risks, which in turn, assists the project manager to calculate
the contingency reserve.
According to the PMBOK Guide 5th edition:

“Expected monetary value analysis is a statistical concept that calculates the average
outcomes when the future includes the scenarios that may or may not happen.”

Therefore, you can say:

1. It helps in calculating the amount required to manage all identified risks.

2. It helps in selecting the choice which involves less money to manage the risks.
You must have the probability, and the impact should it occur to calculate the expected
monetary value of an event.

Once you calculate this data, you will multiply the probability by the impact, and the
result will be the expected monetary value.

Expected Monetary Value (EMV) = Probability * Impact:

From the above table above, you can see that you may need 4,500 USD to manage all
risks, but this would not be correct. Not all risks are going to happen, some of them may
happen and some of them may not. The risks that will not occur will add their EMV to
the pool, and the risks that will occur will utilize the money from the pool.

So, you may need to add 1,100 USD to your budget to cover all identified risks in the
above case.
The expected monetary value concepts work well to calculate the contingency reserve
when you expect a lot of risks, because the more risks you identify, the spread of the

Example-I
You have identified risk with a 30% chance of occurring. If this risk occurs, it may cost
you 500 USD. Calculate the expected monetary value (EMV) for this risk event.

Given in the question:

The probability of risk = 30%

Impact of risk = – 500 USD

We know that:

Expected monetary value (EMV) = probability * impact

= 0.3 * – 500

= – 150

The expected monetary value (EMV) of the risk event is -150 USD.

Example-II
You have identified an opportunity with a 40% chance of happening. However, it may
help you gain 2,000 USD if this positive risk occurs. Calculate the expected monetary
value (EMV) for this risk event.

Given in the question:

Probability of risk = 40%

Impact of risk = 2,000 USD

We know that:

Expected monetary value (EMV) = probability * impact

= 0.4 * 2,000

= 800
Hence, the expected monetary value (EMV) of the risk event is 800 USD.

Example-III
In your project, you have identified two risks with a 20% and 15 % chance of occurring.
They will cost you 1,000 USD and 2,000 USD respectively if both of these risks happen.

What is the expected monetary value of these risk events?

In the above question, you have two negative risks; therefore, the expected monetary
value of these two risks will be the sum of the expected monetary value of these risks
individually.

Expected monetary value of two risk events = EMV of the first event + EMV of the
second event

EMV of the first event = 0.20 * (-1,000)

= -200

EMV of the second event = 0.15 * (-2,000)

= -300

Therefore, the EMV of these two risks events = (-200) + (-300)

= -500

The expected monetary value (EMV) of these two events is -500 USD.

Example-IV
During risk management planning, your team has identified three risks with probabilities
of 10%, 50%, and 35%. If the first two risks occur, they will cost you 5,000 USD and
8,000 USD; however, it will give you a benefit of 10,000 USD if the third risk occurs.

Determine the expected monetary value of these risk events.

Expected monetary value of three events = EMV of the first event + EMV of the second
event + EMV of the third event

EMV of the first event = 0.10 * (-5,000)

= -500
EMV of the second event = 0.50 * (-8,000)

= -4,000

EMV of the third event = 0.35 * 10,000

= 3,500

EMV of all three events = EMV of the first event + EMV of the second event + EMV of
the third event

= – 500 – 4,000 + 3,500

= -1,000

The expected monetary value (EMV) of all three events is -1,000 USD.

Operations: Introduction to Break-even Analysis

Break-even analysis is a technique widely used by production management and

management accountants. It is based on categorising production costs between those
which are "variable" (costs that change when the production output changes) and those
that are "fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine
thelevel of sales volume, sales value or production at which the business makes neither a
profit nor a loss (the "break-even point").

Fixed Costs

Fixed costs are those business costs that are not directly related to the level of
production or output. In other words, even if the business has a zero output or high
output, the level of fixed costs will remain broadly the same. In the long term fixed costs
can alter - perhaps as a result of investment in production capacity (e.g. adding a new
factory unit) or through the growth in overheads required to support a larger, more
complex business.
Examples of fixed costs:
- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs

Variable Costs

Variable costs are those costs which vary directly with the level of output. They
represent payment output-related inputs such as raw materials, direct labour, fuel and
revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable
costs.

Direct variable costs are those which can be directly attributable to the production of a
particular product or service and allocated to a particular cost centre. Raw materials and
the wages those working on the production line are good examples.

Indirect variable costs cannot be directly attributable to production but they do vary with
output. These include depreciation (where it is calculated related to output - e.g.
machine hours), maintenance and certain labour costs.

An important term used with break-even point or break-even analysis is contribution margin. In
equation format it is defined as follows:

The contribution margin for one unit of product or one unit of service is defined as:

At Oil Change Co. the contribution margin per car (or per oil change) is computed as follows:

The contribution margin per car lets you know that after the variable expenses are covered, each car
serviced will provide or contribute $15 toward the Oil Change Co.'s fixed expenses of $2,400 per
week. After the $2,400 of weekly fixed expenses has been covered the company's profit will increase
by $15 per car serviced.
Break-even Point In Units
The break-even point in units for Oil Change Co. is the number of cars it needs to service in order to
cover the company's fixed and variable expenses. The break-even point formula is to divide the total
amount of fixed costs by the contribution margin per car:

It's always a good idea to check your calculations. The following schedule confirms that the break-
even point is 160 cars per week: