Formula for calculating Risk Adjusted NPV
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
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.