Net Present Value Risk Modelling


A brief guide


Practical Project Risk Management


By Martin Hopkinson

United Kingdom


Net Present Value (NPV) risk analysis is a useful means of analyzing overall project risk during the earlier phases of a project. It can be used to:

  1. Help decide whether or not to continue the project e.g. at major gate reviews.
  2. Validate the project business case from a risk perspective.
  3. Quantify the implications of time profiling uncertainties that affect costs and benefits.
  4. Support choices between mutually exclusive options when designing the project solution.
  5. Identify which sources of uncertainty have the most influence on the project’s outcome.

A key advantage is that, by requiring the risk management process to take into account risk to both the project’s delivery and its benefits, the analysis clarifies the risk implications of trade-offs between the two.

The NPV Formula


Simple NPV risk models can sometimes be developed deterministically e.g. using a calculator. In most cases, however, a spreadsheet model will need to be developed for Monte Carlo simulation. Typically, the spreadsheet will include a breakdown of project costs and benefits listed vertically with accounting periods (usually years) arranged horizontally. Factors driving costs and benefits, together with uncertainty in their timing as driven by key milestones are represented using probability density functions i.e. the input risk estimates.


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Editor’s note: This series of articles is by Martin Hopkinson, author of the books “The Project Risk Maturity Model” and “Net Present Value and Risk Modelling for Projects” and contributing author for Association for Project Management (APM) guides such as Directing Change and Sponsoring Change. These articles are based on a set of short risk management guides previously available on his company website, now retired. For an Introduction and context for this series, click here. Learn more about Martin Hopkinson in his author profile below.

How to cite this paper: Hopkinson, M. (2023). NPV Risk Modelling: A brief guide, Practical Project Risk Management series, PM World Journal, Vol. XII, Issue XI, November. Available online at https://pmworldlibrary.net/wp-content/uploads/2023/11/pmwj135-Nov2023-Hopkinson-npv-risk-modelling-2.pdf

About the Author

Martin Hopkinson

United Kingdom


Martin Hopkinson, recently retired as the Director of Risk Management Capability Limited in the UK, and has 30 years’ experience as a project manager and project risk management consultant. His experience has been gained across a wide variety of industries and engineering disciplines and includes multibillion-pound projects and programmes. He was the lead author on Tools and Techniques for the Association for Project Management’s (APM) guide to risk management (The PRAM Guide) and led the group that produced the APM guide Prioritising Project Risks.

Martin’s first book, The Project Risk Maturity Model, concerns the risk management process. His contributions to Association for Project Management (APM) guides such as Directing Change and Sponsoring Change reflect his belief in the importance of project governance and business case development.

In his second book Net Present Value and Risk Modelling for Projects he brought these subjects together by showing how NPV and risk modelling techniques can be used to optimise projects and support project approval decisions. (To learn more about the book, click here.)

To view other works by Martin Hopkinson, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/martin-hopkinson/