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risk-adjusted net present value

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In finance, rNPV (risk-adjusted net present value) or eNPV (expected NPV) is a method to value risky future cash flows. rNPV modifies the standard NPV calculation of discounted cash flow (DCF) analysis by adjusting (multiplying) each cash flow by the estimated probability that it occurs (the estimated success rate). In the language of probability theory, the rNPV is the expected value

rNPV is the standard valuation method in the drug development industry, where sufficient data exists to estimate success rates for all R&D phases. In finance, a similar technique is used in the probability model of CDS valuation, but in other financial contexts one instead incorporates risk by using a risk premium in the discount rate.

References

  • Boris Bogdan and Ralph Villiger, Valuation in Life Sciences. A Practical Guide, 2010, third edition, Springer Verlag.
  • First published reference: Stewart JJ, Allison PN, Johnson RS. Putting a price on biotechnology. Nat Biotechnol. 2001 Sep;19(9):813-7.
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