The Basics
Discounting
Net Present Value
Terminal Value
Value Added
The Decisions
Discount Rate
Hurdle Rate
Weighted Average Cost of Capital
(WACC)
The Math
Estimate Terminal
Value
Annuity Method
Market Value/Sales
Compare Methods
DCF Key Questions
Combine Action Plans
Key Points
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When is it mature?
The Terminal Value
We 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.
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.
Net Present Value |
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The logic to determine Value Added
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