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

Strategy Formulation
Computing a strategy's value
In
the Action Plans chapter,
I went through the calculations to estimate the cash flow for one action
plan. In this chapter, I'm
going to demonstrate how to compute, using discounted cash flow, the
value added from a multiyear strategy with many action plans. In essence, how to set the financial stretch, big hairy audacious goal (BHAG).
As we
go through the
calculations, I'll describe some questions
about and approaches for selecting the discount rate, and using net
present value (NPV), present value (PV) and calculating the terminal value. I recommend
you read the entire chapter.
A Story — Your boss called and asked you to come discuss “our strategy”
A brazen, talented salesperson, a gray haired
contrarian from the 18th century, and our heroine chanced to meet at Starbucks an hour later and
got into
a discussion about estimating
a strategy's value. (Right  its a fairy tale.)
The brazen, very successful salesperson said that the challenge is most
important. Stretch. Reach for the stars. Prove over and over again how
great we, our company, is and will be. Don't take no for an answer, find
a way to get it done. Put me in the game, now, coach. We are the best!
A positive attitude and relationships. There is no limit to the upside.
Numbers are about
possibilities, about expectations.
The contrarian said we know how to be successful, through ups and downs,
great ideas and bad. Been there, done that. Play to your strengths, be
respected by your customers, lots of smarts, little steps will take you
to the top of the mountain. Shortcuts, overconfidence, will bury you
under an avalanche of loses. Our history has taught us about what it
costs to get new customers.
We know what numbers are reasonable and when someone is blowing smoke.
The boss sipped her coffee and thought a minute.
Action Plans  Key Points


What does "the boss" think

