Risk Management Question 28

[admin]

You are a project manager for a major telecommunications network upgrade with NPV of US$10, 000, 00. You are heavily dependent on a third party vendor for your project and your contact office informs you that there is a 30% chance that the vendor will go out of business at the end of the quarter. If that occurs , your project will incur a US$3,000,00 cost overrun due to rework . there is also a 30% chance that a new legislation will pass that will decrease government oversight of your team’s work. If this legislation passes, you estimate that your project will save US$1,600,000 in time delays. Lastly, your technical lead indicates that there is a 20% chance that a new software package will be available by the month end, that could save US$ 1,800,000 in testing time. If available, the software will cost US$ 500,000 to procure, install and train. What is the total expected monetary value of these 3 risk events?

a) $60,000
b) $1,640, 000
c) $5,900, 000
d) $160,000

[admin]

The correct answer is D.

The expected monetary value of the first risk is 0.3 x $3,000,000 or $900,000. The expected monetary value of the second event is 0.3 x -$1,600,000 or -$480,000. The expected monetary value of the third risk is 0.2 x (-$1,800,000 – $500,000) or -$260,000. The total of all three potential risk events is $900,000 – $480,000 – $260,000 or $160,000.

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[Praveen G]

Hello,

Are you sure about answer of this question?
We should use negative values when risk cost
extra and positive values when risk saves some
cost but calculation is done in other way here.
Can you pls explain this to me? Thanks

[admin]

You can do either way but follow the same throughtout the solution to avoid confusion.

[Author]

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