ECV=[(PV*Pcs-C)*Pts]-D
Pts:
Probability of technical success
Pcs:
Probability of Commercial Success
D:
development costs
C:
commercialization (launch) costs
PV:
Net present value of project’s future earnings- cost – development – capital
This method seeks to max the expected value
subject to certain budget constraints. ECV overcomes some of the NPV
weaknesses:
ECV Advantages:
- It does not consider sunk costs
- It recognizes constraint resources and attempts to max the value of the portfolio in light of this constraint
- It yields the maximum value portfolio
- It considers risks and probabilities both commercial and technical
ECV Disadvantages:
Probability estimates are, by enlarge,
unreliable: “pulling out numbers out of the air”
The method does not look at the balance of
the portfolio between high and low risk projects or across markets and
technologies.
