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The Basics

DCF Key Questions

Combine Action Plans

Key Points

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 value?

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

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 boss" will learn to care about the discount rate? Back to her story.

previous page The Terminal Value

Considerations about the Discount Rate next page


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