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Good day,

I'm currently studying for my PMP, and I'm confused about the following found in the Rita PMP prep book:

A company is trying to determine if prototyping is worthwhile on a project. They have come up with the following impacts of whether the equipment works or fails. Based on the information provided in the diagram, what is the expected monetary value of each option? Which is the cheaper option-to prototype or not to prototype?

It then gives a diagram of the decision tree. The diagram shows that the prototype setup cost is $200,000, and the cost not to prototype is $0. If the company decides to prototype and the equipment fails (35% probability) the impact is $120,000. If it passes (65% probability), there is no impact. If the company decides not to prototype and the equipment fails (70% probability), the impact is $450,000. If it passes (30% probability), there is no impact.

The answer given says the total EMV for prototyping = $242,000 (that is, $200,000 + (0.35*$120,000), and for not prototyping, it is $315,000 (that is, 0.7 * $450,000).

My question is, why does the answer take into consideration the setup cost for only the fail outcome for prototyping (calculating the EMV to be $242,000), but does not consider the setup cost for the pass outcome. I am thinking that the EMV for pass outcome after prototyping should be (0.65 * 0) + $200,000 = $200,000, so total EMV for prototyping = $242,000 + $200,000 = $442,000.

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The EMV for pass outcome is already included in the total EMV for prototyping. It is more clear if you see it this way:

Pass after prototyping: $200,000

Fail after prototyping: $200,000 + $120,000 = $320,000

You have 35% to fail and 65% to pass so:

(0.35*320,000)+(0.65*200,000)=242,000

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