1. What is Adjusted NPV?

The Adjusted Net Present Value (NPV) accounts for risk by adjusting the standard NPV calculation based on the project's standard deviation and the required rate of return. This provides a more realistic valuation of risky investments.

2. How Does the Calculator Work?

The calculator uses the Adjusted NPV formula:

Where:

• \( \text{NPV} \) — Net Present Value in currency
• \( \sigma \) — Standard deviation of returns (%)
• \( RRR \) — Required Rate of Return (%)

Explanation: The adjustment reduces the NPV proportionally to both the risk (standard deviation) and the investor's required return, providing a risk-adjusted valuation.

3. Importance of Risk Adjustment

Details: Risk adjustment is crucial for comparing investments with different risk profiles and ensuring that higher-risk projects are properly discounted in valuation.

4. Using the Calculator

Tips: Enter the original NPV in currency units, the required rate of return as a percentage, and the standard deviation of returns as a percentage. All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: Why adjust NPV for risk?
A: Traditional NPV doesn't account for risk variability. Adjusted NPV helps compare projects with different risk levels more accurately.

Q2: How is standard deviation determined?
A: Standard deviation should be based on historical returns of similar projects or estimated from scenario analysis.

Q3: What's a good RRR?
A: RRR varies by investor and project risk. It's often based on the company's WACC plus a risk premium for specific projects.

Q4: When should I use Adjusted NPV?
A: Use for projects with uncertain cash flows, new ventures, or when comparing projects with different risk profiles.

Q5: Can Adjusted NPV be negative?
A: Yes, if the risk adjustment exceeds the original NPV, indicating the project may not adequately compensate for its risk.