Quantitative Risk Analysis

Assignment #4: Quantitative Risk Analysis

Introduction

After qualitative risk analysis of project risks, quantitative risk analysis is used for risk of high priority (either high threat or opportunity risks). This assignment focuses on some common quantitative risk analysis tools/ techniques.

Decision Tree Analysis is one of the tools and techniques of quantitative risk analysis. Decision trees use Expected Monetary Value (EMV) which is another tool/ technique of quantitative risk analysis. Program Evaluation and Review Technique (PERT) is another tool which uses estimation to complete quantitative risk analysis.

Remember:

The Impact used in EMV is in days or dollars.

PERT is a particular type of 3 point estimation, where the Most Likely estimate is weighted 4 times the optimistic or pessimistic estimates. All 3 estimates are used to calculate PERT.

Below are exercises in both decision tree analysis and PERT estimation.

Exercise 1:

Scenario: You are the PM on a project and you are developing the project schedule, this includes estimating the duration of activities for the project. You ask one of your team members how long it will take them to complete development of a feature in a web application. You want to provide the best numerical estimate possible so you employ the tool/ technique of PERT estimation.

Your team member provides the following estimates for this activity:

Optimistic= 5 days

Pessimistic= 20 days

Most Likely= 12 days

What is the equation used for the PERT estimate?

What is the PERT estimate for this activity?

Exercise 2:

Given the following Decision Tree, perform decision tree analysis to determine which is best to do, make or buy a software application as part of a development project? Remember that this requires the use of EMV.

What is the EMV equation?

Should you make or buy the system?

Note: When calculating the EMV, make sure profits are calculated as positive (+) values and losses are calculated as negative (-) values.

Decision Tree Outline

• System
  • Make
    • 90% – Profit [$50,000]
    • 30% – Simple [$23,000]
    • 70% – Difficult [$34,000]
  • Buy
    • 35% – Minor Changes [$17,000]
    • 65% – Major Changes [$35,000]
    • 90% – Profit [$35,000]

Grading Rubric:

Last Updated on January 28, 2020