RNPV (Risk-adjust net present value)
What is RNPV?
RNPV (Risk-adjust net present value) is a tool that adjusts a regular net present value (NPV) calculation to account for additional risks. As the NPV calculation discounts the future value of an asset or cash flow to give a discounted cash flow (DCF) RNPV effectively risk-adjusts the discount rate.
Where have you heard about RNPV?
As an investor, you may have heard about the RNPV calculation with regard to two quite different areas of the financial markets. It’s used extensively by pharmaceutical and biotechnology firms to estimate the profitability of new drugs, but is also one of the main methods of pricing Credit Default Swaps (CDS).
What you need to know about RNPV.
In drug research and development, there is a problem with the valuation of the post-discovery phase in that the time of its initiation is unknown, if even it is ever to arrive. RNPV in the context uses calculations based on standard discounted cash flow (DCF) techniques to arrive at a valuation, with future cash flows weighted by the probability of a drug progressing from one development stage to the next. CDS valuation methods take this calculation and apply it to discounting for the risks of default events when pricing the swap, where it is known as the ‘probability model’.