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There is a probability of 0.1 that a given risk will occur in a project. If it occurs, it’ll result in a loss of US$10,000. The insurance cost of this event isUS$700 , with a deductible amount of US$250. Should a rational project manager buy this insurance?
a) Yes, since $1000> $950.
b) Yes, since $1000> $700
c) No, since the deductible amount changes the expected monetary value of the risk event
d) No, since $1250 >$1000The correct answer is A.
EMV = P x I. In this case, expected monetary value is 0.1 x $10,000, or $1,000. The insurance cost plus the deductible amount are less than the expected monetary value of the risk event.
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