TOPIC: PMP - Decision Tree Question

You are asked to choose between two projects A or B based on the highest gain (or
the lowest loss). A will cost U.S. $650,000 and B will cost U.S. $467,000. There is a
56% chance that project A will be successful, which will result in a gain of U.S.
$1,800,000. If project A fails there will be a loss of U.S. $900,000. There is a 67%
project B will be successful, and that will result in a U.S. $950,000 gain. If Project B
fails there will be a loss of U.S. $670,000. Based on this information, what is the
value of the best alternative?
A. U.S. $-38,000
B. U.S. $38,000
C. U.S. $-51,600
D. U.S. $51,600

Dear Monique,

The answer should be choice A: US$-38,000.

You need to calculate the EMV of Project A and B, and select the highest gain (more +) or the lowest loss (less -) between EMV of Project A and B.

EMV of Project A = -650,000 (cost) + 56% x 1,800,000 (success) - 44% x 900,000 (failure) = -38,000
EMV of Project B = -467,000 (cost) + 67% x 950,000 (success) - 33% x 670,000 (failure) = -51,000

Since -38,000 is bigger than -51,000, this is the answer.