 # Formula for calculating Risk Adjusted NPV

Dear All,

I was going through BI report of PPM and I found one issue in that i.e. formula for calculating RISK ADJUSTED NPV.  As per my understanding the way we are calculating formula for RISK ADJUSTED NPV is wrong.

Correct me, if I am wrong and also provide inputs and your understanding for the same.

As per formula used in BI reports for deriving Risk Adjusted

NPV = Net Present Value * Derived Risk / 100.

And Derived Risk: (1- Probability Technical Success% + 1 – Probability Commercial Success) / 2

For Example:

If pts. = 80% and pcs = 50%

Risk = [(1 – 80%) + (1 – 50%)] / 2

Derived Risk = 35%

NPV = 100000 INR

As per formula, my Risk Adjusted NPV = 100000 * 35/100 = 35000 INR

But as per my understanding, it should be 100000 * (100-35)/100= 65000 INR.

Kindly Correct and provide your inputs for the same.

With Regards

Amit Dhār

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You must be Logged on to comment or reply to a post. Not a Ppm expert, but pts will influence pcs to some extend, and inversely high pcs may decrease pts. Capturing this double inverse cause-effect will get you to an overall success factor.

I agree, the current formula is not capturing this.

Cheers, Hi Amit,

What is the PPM version where you found this NPV related issue? Any solution/workaround yet for this? We might do an implementation in PPM and hence curious to know. Amit Dhar
Blog Post Author

Hi Ashwini,

I found this issue in PPM BI reports.

Thanks

Amit Dhar