The project manager should determine the value of the vendor's bid by calculating the expected monetary value (EMV) of the bid. The EMV is the product of the probability and the impact of a risk event or opportunity1. In this case, the vendor's bid has two possible outcomes: a cost overrun of US$100,000 with a
65% probability, or a cost saving of US$50,000 with a 35% probability. The EMV of the bid is calculated as follows:
EMV = (0.65 x 100,000) - (0.35 x 50,000) = 47,500
The value of the vendor's bid is the original bid amount plus the EMV, which is:
Value = 500,000 + 47,500 = 547,500
Therefore, the correct answer is C. US$547,500.
References: (Professional in Business Analysis Reference Materials source and documents)
* PMBOKGuide, 6th edition, Section 11.5.2.2, "Expected Monetary Value Analysis"