finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, risk-adjusted

net present value The net present value (NPV) or net present worth (NPW) is a way of measuring the value of an asset that has cashflow by adding up the present value of all the future cash flows that asset will generate. The present value of a cash flow depends on ...

(rNPV) or expected net existing value (eNPV) is a method to value risky future

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

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 regu ...

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. 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, in financial analysis, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, re ...

(DCF) analysis by adjusting (multiplying) each cash flow by the estimated

probability Probability is a branch of mathematics and statistics concerning events and numerical descriptions of how likely they are to occur. The probability of an event is a number between 0 and 1; the larger the probability, the more likely an e ...

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, expectation operator, mathematical expectation, mean, expectation value, or first Moment (mathematics), moment) is a generalization of the weighted average. Informa ...

. 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 Rate of retur ...

percentage to the discount rate, i.e. as opposed to weighting the cash flows.

References

{{Reflist Valuation (finance) Fundamental analysis

See also

References