Small volume dc-link capacitor becomes attractive due to low price and reduced size in permanent magnet synchronous motor (PMSM) drive system. However, small dc-link capacitors will inevitably lead to large dc-link voltage fluctuations and affect the system stability, especially for sensorless control and operation at high speed and high torque conditions. Moreover, the dc-link voltage sensor could be faulty due to some harsh environments, which will introduce the voltage measurement error, such as zero offset and gain variation, etc. The control performance may become even worse when the dc-link voltage sensor is faulty. Therefore, in this paper, the effect of measurement error in bus voltage on the extended back electromotive force (EEMF) sensorless method is studied. Furthermore, a dc-link voltage observer based on power balance is proposed in case of dc-link voltage sensor is faulty. The voltage observer can eliminate the measurement error caused by voltage sensor faults and improve the stability of the EEMF method. Experiments verify the effectiveness of the proposed dc-link voltage observer.