Expected commercial value (ECV), also known as estimated commercial value,Steven Bragg (2020)
R&D funding decisions
/ref> is a prospect-weighted value for a "project" with unclear conclusions; it is similar to expected net existing value (ENPV). In general ECV is used as a supplementary

capital budgeting Capital budgeting in corporate finance is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects ...

technique, in that it allows an analyst to compare each project's expected value against its

net present value The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ...

as usually calculated, i.e. using planned and contracted costs. The company can thereby maximize the value and worth of its

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...

of projects, while working within its

budget constraint In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preferenc ...

s. As with ENPV, developments are defined to represent different project outcomes, with each scenario being assigned a possibility. A project value is computed for each scenario, and the expected commercial value is obtained by multiplying each situation's value by the scenario odds and adding the results. Depending on the procedures used to estimate the value of the project under each scenario, ECV can be a useful way to address project uncertainties. However, as indicated below, the technique often involves explanations that may or may not be appropriate. Several techniques are used to estimate the probabilities and cashflows of the scenarios; often, the project may be broken down into stages which are represented in a

decision tree A decision tree is a decision support tool that uses a tree-like model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm that only contains condi ...

. In reality, technical and commercial successes are not definite outcomes. There are changeable degrees of technical success and, assuming the product is launched, commercial sales could be anywhere within a variety of possibilities. Still, depending on the assertion, the simple formula may provide a satisfactory calculation. More generally, because ECV is a simplified version of ENPV, it has the limitations of the more general approach (including omission of non-financial sources of project value, and the potential for insufficient treatment of risk).

References

See also