In
finance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
,
rNPV (risk-adjusted
net present valueIn finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
) or
eNPV (expected NPV) is a method to value risky future
cash flowCash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
s. rNPV modifies the standard NPV calculation of
discounted cash flowIn finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
(DCF) analysis by adjusting (multiplying) each cash flow by the estimated
probabilityProbability is ordinarily used to describe an attitude of mind towards some proposition of whose truth we arenot certain. The proposition of interest is usually of the form "Will a specific event occur?" The attitude of mind is of the form "How certain are we that the event will occur?" The...
that it occurs (the estimated
success rateSuccess rate is the fraction or percentage of success among a number of attempts, and may refer to:* Opportunity success rate* When success refers to attempts to induce pregnancy, then pregnancy rate is used**Artificial insemination success rates...
). In the language of probability theory, the rNPV is the
expected valueIn probability theory, the expected value of a random variable is the weighted average of all possible values that this random variable can take on...
rNPV is the standard valuation method in the
drug developmentDrug development is a blanket term used to define the process of bringing a new drug to the market once a lead compound has been identified through the process of drug discovery...
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 premiumA risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset...
in the discount rate.