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The Basics

DCF Key Questions

Combine Action Plans


Key Points

Key questions

"The boss" jotted down her conclusions and the questions for consideration.

The value added by an action plan is the NPV of the development to growth phases and the present value of the terminal phase

Conclusions

  • The NPV calculation projects investment and growth required from development through the growth phases, the short term opportunity. The terminal value represents the long-term value to the firm. As long as the calculation methods are consistent, the relative opportunities of both can be compared - short-term to short-term and long-term to long-term.
  • For outside investors or analysts, we should present the data using calculations they trust. For internal screenings, we should keep the method simple and persuasive to our key players.
  • Using a hurdle rate as the discount rate is a stretch approach. Using WACC, our cost of capital, is a sustainment approach.
  • There a many complex, sophisticate models to predict value, but no one today has much confidence in their numbers more than two years into the future. It is a guess.

Key leadership questions

  • Have we screened out modest projects that over the long run will make acceptable's returns?
  • Should our expected return be based on market expectations or our historical performance?
  • Should we use an industry average weighted cost of capital or an estimate of our firm's WACC, or base it on our expectations for our future borrowing costs and stock price?
  • Who is going to use the analysis and is the method we use persuasive to them?
  • Since outcomes in strategy formulation are measured by profitability, is the long term view better, is the annuity method or the market to sale ratio better for us?

previous page Compare annuity method
       to market value/sales

Combine Action Plans Cost and next page
Benefits to a Strategy's Value        

 



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