# How to Calculate a Risk-Adjusted NPV

Probability adjustments can be made at the discount rate level or cash flow level.
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Net present value is equal to the sum of the present values of a project's anticipated cash outflows and inflows, netted against each other. The present value of the cash flows is calculated using a discount rate that reflects the project's required rate of return on investment. Risk-adjusted net present value accounts for the risk associated with the projected cash flow amounts varying from their forecast amount. Risk in this case is a measure of variation in results.

## Calculating Risk-Adjusted Net Present Value

The theoretical structure of a risk-adjusted NPV calculation is of a probability tree, which details all likely scenarios and the ensuing cash flows, as well as the probability of each likely scenario occurring. Incorporating probability into a cash flow estimate is relatively simple. If a hypothetical scenario results in a net cash inflow of \$100, and its probability of occurring is 50 percent, the value of the net cash flow is equal to probability, 50 percent, multiplied by the net cash flow, \$100, or \$50. All that is left is to calculate its present value, although this must be done for each potential cash inflow and outflow to be generated by the investment.