Question

how to determine the expected value of a project. Explain whether a proposed project is easily quantified or whether you will need to use some non-numeric information for calculating the value of the project. Include the following: Examine the sources of information that can be used for budgeting. Determine the probability that the information is correct. Would simulation increase the accuracy? Why or why not?

Answer 1

Process of determining expected value of a project:

• Familiarize with the problem
• Identify all possible outcomes
• Look for alternatives
• Assign a value to each outcome and relative probability to achieve it
• Interpret the result
• Prepare contingencies

A proposed project has to be quantified well enough to determine it’s value and possibility of success. Non numeric information does not really help to calculate a project’s success or Returns on Investment or Rate of return.

Sources of information that can be used for budgeting:

• business plan
• Historical information
• Market research primary/ secondary
• Previous years’ budget costs
• Sources of Income/ Cash flow
• Availability of working capital
• Overhead costs
• Fixed and variable costs info

Determine the probability:

If information checked is quantitative and is available from previous records, then of course it can be cross checked and probability will be maximum for its authenticity. In case of Qualitative, information cannot always be checked, unless mentioned in any records/ legitimate research companies or websites etc.

Yes, Simulations do increase accuracy. Many financial modules in simulations are available in market and used by Project Management companies to simply and increase the speed and effectives in such operations