Expected Values and NPV for Capital Projects I should know this from my MBA days, but I seem to have forgotten. I am evaluating several capital investment projects and I am struggling to figure out how I take into account the probability that I might not win the project because the project is competitively bid (I might not win the contact since there are 3 bidders for the work 33% chance of winning).
For example, I have 2 projects that require the same investment and have the same cash flows and NPV's / IRR's. However, I have a 50% chance of winning one and a 75% chance of winning the other. My staff and I are debating whether we discount the revenue expectations by 50% or 25% and then calculate the NPV's / IRR's assuming 100% of the initial investment required or do we just discount the NPV / IRR assuming 100% of the revenue and 100% of the initial investment.
My question is do you account for the probability of winning in the cash flows or discount the NPV / IRR after you model the actual investment cash flows? I appreciate the help. If I have an investment opportunity to win $100M worth of new work by spending $1M in initial investment but my chances of winning that work is 50%, do I model $50M of revenues or do I model $100M and discount the resulting NPV by 50%? Raise Your Professional Profile, Answer This Question |
