In
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
, rNPV ("risk-adjusted
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 ...
") or eNPV ("expected NPV") is a method to value risky future
cash flow
A cash flow is a real or virtual movement of money:
*a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
s.
rNPV is the standard valuation method in the
drug development
Drug development is the process of bringing a new pharmaceutical drug to the market once a lead compound has been identified through the process of drug discovery. It includes preclinical research on microorganisms and animals, filing for re ...
industry,
where sufficient data exists to estimate success rates for all R&D phases.
[Stewart JJ et al]
Putting a Price on Biotechnology
Nature Biotechnology
''Nature Biotechnology'' is a monthly peer-reviewed scientific journal published by Nature Portfolio. The chief editor heads an in-house team of editors. The focus of the journal is biotechnology including research results and the commercial busi ...
. 2001. 19:5
A similar technique is used in the
probability model of credit default swap (CDS) valuation.
rNPV modifies the standard NPV calculation of
discounted cash flow
The discounted cash flow (DCF) analysis is a method in finance of valuing a security, project, company, or asset using the concepts of the time value of money.
Discounted cash flow analysis is widely used in investment finance, real estate devel ...
(DCF) analysis by adjusting (multiplying) each cash flow by the estimated
probability
Probability is the branch of mathematics concerning numerical descriptions of how likely an event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and 1, where, roughly speaking, ...
that it occurs (the estimated success rate). In the language of probability theory, the rNPV is the
expected value
In probability theory, the expected value (also called expectation, expectancy, mathematical expectation, mean, average, or first moment) is a generalization of the weighted average. Informally, the expected value is the arithmetic mean of a ...
.
Note that this in contrast to the more general valuation approach, where risk is instead incorporated by adding a
risk premium
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less ...
percentage to the discount rate, i.e. as opposed to weighting the cash flows.
See also
*
*
Expected commercial value
*
*
*
First Chicago Method
The First Chicago Method or Venture Capital Method is a business valuation approach used by venture capital and private equity investors that combines elements of both a multiples-based valuation and a discounted cash flow (DCF) valuation approac ...
*
Penalized present value
References
{{Reflist
Valuation (finance)
Fundamental analysis