A project manager must choose between two vendors for a component. Vendor A offers a firm fixed price of $80,000. Vendor B offers $60,000, but there is a 40% chance that a $60,000 rework charge will be required. Based on expected monetary value, which choice is preferable and what is its expected cost?

Question

Accepted Answer

Vendor A, at $80,000. EMV of Vendor B = 60,000 + (0.40 × 60,000) = 60,000 + 24,000 = $84,000. Vendor A's expected cost is the firm price of $80,000. Since $80,000 < $84,000, Vendor A is the lower-cost expected choice.

More Process challenges