Evaluate Expected Monetary Value (EMV)
You are planning to make modifications to an existing application. You have identified:
30% probability of delay of receipt of resources - cost $50,000.
20% probability that the resources will be $10,000 cheaper than planned.
25% probability that there will be a problem integrating with existing software, cost to fix $3,500.
30% probability that the development may be simpler than expected, savings $2,500.
5% probability of a design defect causing $5,000 of rework.
Calculate the net expected value for the project risks and opportunities cited above. How much should you plan for your contingency reserve budget based on the above? You must show all of your calculations. How much would you allocate for the management reserve? What are your assumptions about these reserves?