How To Find Expected Value: The EV Formula
EV = P(X) x n
- EV = the expected value
- P(X) = the probability of the event
- n = the number of the repetitions of the event
Example of Expected Value With Multiple Events
In this scenario, there are three projects your business can launch. You only have funding to launch one. Which should you fund?
Project A
- 100% probability to achieve a value of $3 million upon completion
EV (Project A) = [1.0 * $3,000,000] = $3,000,000
Project B
- 10% probability to achieve a value of $4 million upon completion
- 90% probability to achieve a value of $3 million upon completion
EV (Project B) = [0.1 * $4,000,000] + [0.9 * $3,000,000] = $3,100,000
Project A
- 10% probability to achieve a value of $4 million upon completion
- 70% probability to achieve a value of $3 million upon completion
- 20% probability to achieve a value of $2 million upon completion
EV (Project C) = [0.1 * $4,000,000] + [0.7 * $3,000,000] + [0.2 * $2,000,000] = $2,700,000
Project B achieves the highest expected value. You should fund Project B.
See How Vena Can Help Your Business Plan for the Future
Calculating expected values tells you which of your investment options will generate the best ROI. Your assignment of probabilities and weights—based on objective information and your assumptions— in your financial models will inform you of where to invest.
Stay ahead of change with Vena’s Scenario Planning and Analysis Software. Look into the future, analyze the impact of changes to your investments and determine where to make your next investment.
