Expected Net Present Value (eNPV)

An Expected Net Present Value (eNPV) is a net present value that incorporates probability assessments of different outcome scenarios to create a risk-adjusted valuation microeconomic economic measure.

• Context:
  • It can typically calculate Expected Investment Value by weighting possible NPV outcomes with their probability of occurrence.
  • It can typically account for Expected Project Risk through probability distribution of possible future cash flows.
  • It can typically provide Expected Decision Support for project selection under uncertainty conditions.
  • It can typically integrate Expected Success Probability and expected failure probability at various project stages.
  • It can typically reflect Expected Development Path options with their associated probability and financial outcomes.
  • ...
  • It can often enhance Expected Capital Budgeting through more realistic valuation than deterministic NPV calculations.
  • It can often facilitate Expected Investment Comparison across projects with different risk profiles.
  • It can often incorporate Expected Market Condition variation through scenario analysis and probability assignment.
  • It can often address Expected Uncertainty Impact that traditional NPV calculation ignores.
  • ...
  • It can range from being a Simple Expected Net Present Value (eNPV) to being a Complex Expected Net Present Value (eNPV), depending on its scenario complexity and probability distribution sophistication.
  • It can range from being a Conservative Expected Net Present Value (eNPV) to being an Optimistic Expected Net Present Value (eNPV), depending on its probability assignment approach to unfavorable scenarios.
  • It can range from being a Discrete Expected Net Present Value (eNPV) to being a Continuous Expected Net Present Value (eNPV), depending on its probability distribution model.
  • ...
  • It can integrate Expected Phase Transition Probability for multi-stage project evaluation.
  • It can utilize Expected Cash Flow Scenarios with their corresponding probability weights.
  • It can model Expected Development Outcomes and their financial consequences at each decision point.
  • It can combine Expected Technical Success Probability and expected regulatory success probability for comprehensive risk assessment.
  • ...
• Examples:
  • Expected Net Present Value Calculation Methods, such as:
    • Discrete Scenario Expected Net Present Value (eNPV), such as:
      • Three-Scenario Expected Net Present Value (eNPV) using best-case, base-case, and worst-case scenarios.
      • Five-Scenario Expected Net Present Value (eNPV) with very optimistic, optimistic, most likely, pessimistic, and very pessimistic scenarios.
    • Probabilistic Expected Net Present Value (eNPV), such as:
      • Monte Carlo Simulation Expected Net Present Value (eNPV) for complex probability distribution modeling.
      • Decision Tree Expected Net Present Value (eNPV) for sequential decision analysis.
  • Expected Net Present Value Applications, such as:
    • Pharmaceutical Development Expected Net Present Value (eNPV) for drug development project assessment.
    • Oil Exploration Expected Net Present Value (eNPV) for petroleum project valuation.
    • Research and Development Expected Net Present Value (eNPV) for innovation investment decision.
    • Startup Venture Expected Net Present Value (eNPV) for venture capital investment analysis.
  • Expected Net Present Value Formulas, such as:
    • Weighted Average Expected Net Present Value (eNPV): eNPV = Σ(P₁ × NPV₁ + P₂ × NPV₂ + ... + Pₙ × NPVₙ), where:
      • P₁, P₂, ..., Pₙ = probability of each scenario
      • NPV₁, NPV₂, ..., NPVₙ = net present value of each scenario
    • Phase-Based Expected Net Present Value (eNPV): eNPV = Σ(PTS₁ × PTS₂ × ... × PTSₙ × NPVSuccess) - Costs, where:
      • PTS₁, PTS₂, ..., PTSₙ = probability of technical success in each development phase
      • NPVSuccess = net present value in case of successful development
  • ...
• Counter-Examples:
  • Deterministic Net Present Value, which uses single-point estimates rather than probability-weighted multiple scenarios.
  • Internal Rate of Return (IRR), which calculates the discount rate that makes NPV zero rather than expected monetary value.
  • Real Options Analysis, which incorporates management flexibility value rather than just probability-weighted scenario value.
  • Payback Period Analysis, which focuses on time to recoup investment rather than risk-adjusted present value.
• See: Net Present Value (NPV), Actual NPV, Risk-Adjusted NPV, Valuation Microeconomic Economic Measure, Project Risk Assessment Tool, Probability-Weighted Analysis, Decision Analysis Method.

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References

2023

• chat
  • Expected NPV, or "Net Present Value," is a financial metric used to estimate the potential profitability of an investment or project. It takes into account the initial cost of the investment, as well as the expected future cash flows from the investment, and discounts them back to their present value using a chosen discount rate.

    To calculate expected NPV, follow these steps:

    1. Determine the initial cost of the investment or project.
    2. Estimate the expected future cash flows associated with the investment or project. This can be done by forecasting the future revenues and costs associated with the investment, and discounting them to their present value.
    3. Choose a discount rate that reflects the risk associated with the investment or project. This rate is often based on the cost of capital for the organization making the investment.
    4. Calculate the present value of the expected cash flows by discounting them back to their present value using the chosen discount rate.
    5. Subtract the initial cost of the investment from the present value of the expected cash flows. The result is the expected NPV.
  • Here is an example to illustrate:

    Suppose a company is considering a project that will cost $100,000 to implement, and is expected to generate future cash flows of $30,000 per year for the next five years. The company has determined that the appropriate discount rate for the project is 10%.

    To calculate the expected NPV of the project, first, we need to calculate the present value of the expected cash flows:

    • Year 1: $30,000 / (1 + 0.10)^1 = $27,273
    • Year 2: $30,000 / (1 + 0.10)^2 = $24,793
    • Year 3: $30,000 / (1 + 0.10)^3 = $22,539
    • Year 4: $30,000 / (1 + 0.10)^4 = $20,490
    • Year 5: $30,000 / (1 + 0.10)^5 = $18,627
  • Present value of expected cash flows: $113,722
  • Then, we subtract the initial cost of the investment:

    Expected NPV = $113,722 - $100,000 = $13,722

  • This result indicates that the expected future cash flows from the investment exceed its initial cost, suggesting that the investment is likely to be profitable.

2021

• https://xplaind.com/993748/expected-npv
  • QUOTE: Expected net present value is a capital budgeting technique which adjusts for uncertainty by calculating net present values under different scenarios and probability-weighting them to get the most likely NPV.

    For example, instead of relying on a single net present value, companies calculate NPVs under a range of scenarios: say, base case, worst case and best case, estimate probability of occurrence of each scenario, and weighs the NPVs calculated according to their relative probabilities to find the expected NPV.

     Expected NPV is a more reliable estimate than the traditional NPV because it considers the uncertainty inherent in projecting future scenarios. ...

2018

• (Levitan et al., 2018) ⇒ Bennett Levitan, Kenneth Getz, Eric L. Eisenstein, Michelle Goldberg, Matthew Harker, Sharon Hesterlee, Bray Patrick-Lake, Jamie N. Roberts, and Joseph DiMasi. (2018). “Assessing the Financial Value of Patient Engagement: A Quantitative Approach from CTTI’s Patient Groups and Clinical Trials Project.” Therapeutic innovation & regulatory science 52, no. 2
  • QUOTE: … We developed an approach to estimate the financial value of patient engagement.

    Methods: Expected net present value (ENPV) is a common technique that integrates the key business drivers of cost, time, revenue, and risk into a summary metric for project strategy and portfolio decisions.

    ...

  • A revenue stream with accompanying development, manufacturing, and marketing costs can be summarized using net present value (NPV).33-35 NPV is defined here as the after-tax, inflation-adjusted present value of the future net cash flow, assuming successful development and regulatory approval. Because a project in development can fail before it ever gets to the market—resulting in a loss of investment—the expected net present value (ENPV) is used to reflect the NPV, accounting for the various paths that lead to failure or success. ENPV is a widely recognized metric that combines the revenue, cost, and time value drivers with the associated risks of getting to market and reflects the risk-adjusted NPV.30-38.
  • ENPV is assessed by considering each possible path (i.e., failing at different points in development or achieving regulatory approval) and estimating for each path taken (Figure 1). The present value of the costs and revenues (or just costs if failure occurs before launch) for each path is multiplied by the probability of that path occurring. The sum total of all these risk-adjusted NPVs is the ENPV of the entire project. For example, a drug currently in phase 2 will either succeed or fail phase 2. Success creates the opportunity to move into phase 3, while failure entails spending of costs committed through the end of phase 2 or to premature termination of a study. Similarly, the phase 3 probability of technical success and probability of regulatory success determine how likely it is that funds are lost due to failure or that revenue is gained due to regulatory approval.

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