The logic of calculating the value added
When you compare different approaches to accomplish your strategy, one
of the most important questions to ask is: what will add to the value
of the firm? What is that future value added worth today, its present
To estimate that value added for an action plan, we discount the future
cash flows back to a value in today's dollars by calculating the NPV of the development, introduction
and growth phases, and add that to the PV of the terminal
year, when the
project is mature.
To estimate the value added for a strategy, we combine the NPV and PV
of all its action plans.
That leads to crux questions: which discount rate or discount rates
do we use to compare alternative approaches using NPV and PV? How do
we calculate the terminal value?
That is why "the
learn to care about the discount rate? Back to her story.
The Terminal Value
Considerations about the Discount Rate