Evaluate the expected monetary values for the following risks Risk Probability Risk Value Risk #1 0.7 $575,000 Risk #2 0.25 $310,000 What should the contingency be for these risks?

Evaluate the expected monetary values for the following risks Risk Probability Risk Value Risk #1 0.7 $575,000 Risk #2 0.25 $310,000 What should the contingency be for these risks?

• A. $575,000
• B. $480,000
• C. $310,000
• D. $885,000

Answer: (B)

The idea being tested is using expected monetary value to set a project contingency. For each risk, you multiply the probability by the potential loss to get its expected cost, then add these values together to form the total contingency. Compute for the first risk: 0.7 × $575,000 = $402,500. Compute for the second risk: 0.25 × $310,000 = $77,500. Add them: $402,500 + $77,500 = $480,000. So the contingency should be $480,000. The other options would represent either the full loss of a single risk, the unweighted sum of losses, or the value of the second risk alone, none of which reflect the probability-weighted expectation.

The idea being tested is using expected monetary value to set a project contingency. For each risk, you multiply the probability by the potential loss to get its expected cost, then add these values together to form the total contingency.

Compute for the first risk: 0.7 × $575,000 = $402,500. Compute for the second risk: 0.25 × $310,000 = $77,500. Add them: $402,500 + $77,500 = $480,000.

So the contingency should be $480,000. The other options would represent either the full loss of a single risk, the unweighted sum of losses, or the value of the second risk alone, none of which reflect the probability-weighted expectation.