Management Glossary

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expected value
A measure used to evaluate the advisability of undertaking an action with uncertain outcomes. Expected value is calculated by multiplying the value of each possible outcome by the probability of it happening and summing the result for all possible outcomes.

For example, if you are considering undertaking a project and believe that there are only three possible outcomes for the project:
  • There is a 60% chance that the project will show a $1,000 profit.
  • There is a 30% chance that the project will just break-even (no profit, no loss).
  • There is a 10% chance that the profit will show a $500 loss.
Then the expected value of the project is:
(0.6 x $1,000) + (0.3 x $0) + (0.1 x -$500)
  = $600 + $0 - $50
  = $550.
Contributed by: ManagerWise Staff

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