Net Present Value (NPV) Analysis

The core technical feature of the R/V Platform is its ability to simulate continuous time stochastic processes in large numbers and evaluate very large numbers of financial contracts driven by those processes over time. Using the simulated future cash flows implied by the contracts NPVs of those contracts can be established by appropriate discounting. The NPV of each simulation round represents a single point of the NPV distribution of the contract being simulated.

Financial contracts analysed can be simple cost and revenue flows of regular corporate business operations, but they may also be complex derivatives products with rather specific features. The number of contracts being analysed at a time is only limited by system memory and by some technical parameters.

Once the NPV distribution of the contract has been established by a sufficient number of simulation rounds its expected value and other key statistics can be computed, analysed and benchmarked against relevant alternatives. This procedure represents a sound full valuation approach to evaluating financial contracts and their risk profiles, both in absolute and comparative terms. The full valuation approach is particularly useful and it represents a very low model risk in the analysis of complex contracts (e.g. Synthetic CDO products), in which uses of short-cut approaches and severe simplifying assumptions have turned out almost fatally misleading.

Applications of NPV analysis are extensive. They include valuations and risk analyses of complex derivatives products, but they also include shadow valuation of corporate operations. In the latter applications use of internal information not known by the market should increase management understanding of the quality of the stock market valuations, and it might help the management in the timing and planning of acquisition and disinvestment decisions.