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The Basics

DCF Key Questions

Combine Action Plans


Key Points

When is it mature?
The Terminal Value

Five years of cash flowsLife cycle of a projectWe use NPV to assess the development, introduction and growth stages in a strategy's life cycle. Most examples use a five year period for a product or service offering to mature, but there is nothing sacred about five years.

 

Terminal value, when the project is mature

After the program matures, it has a predictable cash flow, a predictable value to the firm - similar to a bond. This concept is called the terminal value or the residual value. (I'll use terminal value in my text.) Think of it as the principal ($119) of a 10% bond that earns $11.90/year.

Cues the product is in its mature phase

The terminal value is calculated the year after you estimate the program will be mature, after the sale growth rate has stabilized or begins to decline, and there is no pressing need to increase the rate investment each year. It could happen in a few years or ten years.

For the strategic planning team leader, the decision to use a terminal value or to just consider the development, introduction and growth stages must be coordinated with the CFO, Controller or the analyst in Finance who monitors the team's strategy.

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The logic to determine Value Added next page

 



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