Expected commercial value

Expected commercial value

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It seeks to maximize the value of commercial worth of the portfolio, subject to certain budget constraints. The report shows the portfolio hierarchy with its items and their values for Expected Commercial Value and Net Present Value compared to planned and actual cost. The numbers are aggregated on bucket levels.ECV is a probability-weighted value for a project with uncertain outcomes similar to expected net present value (ENPV). As with ENPV, scenarios are defined to represent different project outcomes, and each scenario is assigned a probability. A project value is computed for each scenario. The expected commercial value is obtained by multiplying each scenario's value by the scenario probability and adding the results. Estimated commercial value is another term for ECV. Depending on the techniques used to estimate the value of the project under each scenario (and on the techniques used to estimate the probabilities of the scenarios), ECV can be a useful way to address project uncertainties. However, as indicated below, the technique often involves simplifications that may or may not be appropriate. Typically, ECV denotes a simplified version of ENPV often appropriate for projects that generate new products. The project is broken into stages which are represented in a decision tree. In reality, of course, technical and commercial success are not yes/no outcomes. There are varying degrees of technical success and, assuming the product is launched, commercial sales could be anywhere within a range of possibilities. Still, depending on the application, the simple formula may provide a sufficient approximation. More generally, because ECV is a simplified version of ENPV, it has the limitations of the more general approach (including omission of non-financial sources of project value and potential for inadequate treatment of risk.

Calculation

Displays information based one of the following measures:

Expected commercial value (ECV)

The formula used to generate the ECV is"'ECV = [(PV X CS – C) X TS – D] "'where:ECV = expected commercial value of the project

TS = probability of technical success

CS = probability of commercial success

D = development cost remaining in the project

C = commercialization (launch) cost

PV = the present value of the project’s cash flow, after launch without any project costs as they will be subtracted at later stages (in forms of C and D)

References

* Cooper, Robert G: "Winning at new products", 2001, Basic Books

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