EXPECTED VALUE

Expected Value Worksheet

An expected value analysis is a means of selecting the most appropriate course of action among several mutually exclusive (i.e. only one can be selected) alternatives.  Each alternative is evaluated based on its probability, dollar impact, and initial investment amount.  Depending on the outcome desired, the alternative with the maximum or minimum total expected value will most likely be selected.

BENEFITS OF AN EXPECTED VALUE ANALYSIS

An expected value analysis serves as a tool to help your company make rational decisions under a multitude of scenarios.

THE EXPECTED VALUE ANALYSIS PROCESS

• Compile a list of all viable alternatives to be considered
• Determine the initial investment amount and appropriate scenarios for each alternative
• Estimate a probability and dollar impact for each scenario under each alternative
• Calculate a total expected value for each alternative
• Follow up as needed to evaluate actual results against expected values

FURTHER READING

These links elaborate on the topic at hand.  They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.”  For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here.

Decision Tree
Excerpt:  “The primary advantage of a decision tree is that it assigns exact values to the outcomes of different actions, thus minimizing the ambiguity of complicated decisions…  They are also used to help illustrate and assign monetary values to alternative courses of action… “

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