Homework Answers
Option A
The probability of sales = 0.77
The expected sales at this probability = 95,000
Cost of each sale = $550
The probability of sales = 0.23
The expected sales at this probability = 65,000
Cost of each sale = $550
The expected monetary value of option a = 0.77 * 95,000 * 550 + 0.23 * 65,000 * 550
= 40,232,500 + 8,222,500
= $48,455,000
Option B
The probability of sales = 0.61
The expected sales at this probability = 85,000
Cost of each sale = $720
The probability of sales = 0.39
The expected sales at this probability = 70,000
Cost of each sale = $720
The cost of value engineering in option b = $120,000
The expected monetary value of option b = 0.61 * 85,000 * 720 + 0.39 * 70,000 * 720 - 120,000
= 37,332,000 + 19,656,000 - 120,000
= $56,868,000
The EMV for option A is $48,455,000 and the EMV for option B is $56,868,000. Therefore option B has the highest EMV.
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