Question

Suppose that your organization is deciding which of four projects to bid on, as summarized in the following table. Assume that all up-front investments are not recovered, so they are shown as negative profits.

Draw a EMV diagram and calculate the EMV for each project. It would better if you copy the following table in MS Excel and present make a model.

Write a few paragraphs explaining which projects you would bid on.

Be sure to use the EMV information and your personal risk tolerance to justify your answer.

	Chance of Winning	Estimated Profits/Losses	Product
Project 1	30%	$100,000
	70%	($20,000)
		EMV
Project 2	20%	($50,000)
	30%	$40,000
	50%	$70,000
		EMV
Project 3	70%	$20,000
	30%	($5,000)
		EMV
Project 4	30%	$50,000
	30%	$40,000
	20%	$20,000
	20%	($40,000)
		EMV

Answer 1

Formula = Probability x Outcome = EMV

Project (1)	0.3	x	$100000	=	$30000
Final Decision	0.7	x	($20000)	=	($14000)
Project 1's EMV =					$16000

Project (2)	0.2	x	($50000)	=	($10000)
	0.3	x	$40000	=	$12000
Final Decision	0.5	x	$70000	=	$35000
Project 2's EMV =					$37000

Project (3)	0.7	x	$20000	=	$14000
Final Decision	0.3	x	($5000)	=	($1500)
Project 3's EMV =					$12500

Project (4)	0.3	x	$50000	=	$15000
	0.3	x	$40000	=	$12000
	0.2	x	$20000	=	$4000
Final Decision	0.2	x	($40000)	=	($8000)
Project 4's EMV =					$23000