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Risk Adjusted Net Present Value

>> June 21, 2011

Risk adjusted net present value is little different from normal net present value. In normal net present value, we just use normal cut off rate for calculating present value of cash inflows and present value of cash outflow. But for calculating risk adjusted net present value ( eNPV), we use risk adjusted return on investment as cut off rate. This risk adjusted return on investment is more than normal cut off rate because we include some margin for unexpected risk. This excess will be of  risk premium rate. To calculate eNPV is very useful to evaluate risky assets alternatives.  This is also called expected net present value.

Formula of eNPV 

= Present value of Cash Inflows ( With risk adjusted ROI) - Present value of Cash outflow ( With risk adjusted ROI)

Under the probability model, a credit default swap is priced using a model that takes four inputs; this is similar to the rNPV (risk-adjusted NPV) model used in drug development:

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