Most companies – including the movie studios in Hollywood – over-rely on basic tools like discounted cash flow and net present value. Only three or four out of every ten movies made in America breaks even or earns a profit. Yet the decision to green-light a project is usually based solely on “expert opinions” — in other words, executives’ intuition supplemented by standard regression analysis. There’s got to be a better way. We think we’ve found one. MORE

Pre-money valuation is a company’s liquidity before it earns the cash from an investment round. With the contribution of cash to the balance sheet of a business through the shareholder value, the post-money value becomes stronger due to the additional cash earned. Although the capital stock is influenced by the acquisition of extra cash, the share price is not affected. Discounted Cash Flow. MORE

With a record $2 trillion in cash and short-term liquid assets on hand, U.S. Fully 79 percent of companies, including 91 percent with annual revenues greater than $1 billion, use discounted cash flow techniques. There is less consistency, however, in how organizations estimate cash flows and determine the weighted average cost of capital at which those cash flows are discounted. MORE

Ideas with positive discounted cash flows get investment. When investing in new growth businesses, corporate leaders are commonly advised to behave more like venture capitalists. VCs, they’re told, take more of a long-term approach, have a greater degree of risk tolerance, and parcel out their funds in stages to mitigate risk. All of this is right, as far as it goes. MORE

Investors’ core valuation methods ( comparables and discounted cash-flow analysis) both extrapolate past performance into the future — but they fail to predict when the future will be radically different from the past. In 2007, Clayton Christensen co-founded Rose Park Advisors, a hedge fund devoted to investing in disruptive companies. The idea was to transform his theory of disruptive innovation into an investment thesis. MORE

When executives evaluate a potential investment, whether it's to build a new plant, enter a new market, or acquire a company, they weigh its cost against the future cash flows they expect will spring from it. To make sure they're comparing apples to apples, they discount those future cash flows to arrive at their net present value. MORE

But they should also allow the acquisition of software technology to be determined by performance considerations and discounted-cash-flow calculations, not whether the acquisition fits within predetermined capital and operating budgets. Even for software sold under a SaaS contract, the acquisition should be assessed by a multi-period cash-flow analysis, not whether the current operating budget can afford the annual subscription cost. Gillian Blease/Getty Images. MORE

For instance, despite the prominent role that discounted cash flow valuation methods play in academic finance courses, few PE investors use discounted cash flow or net present value techniques to evaluate investments. The private equity industry has grown markedly in the last 20 years and we know more than we used to about its effects on the economy. MORE

Combining these creates a P&L and a projection, which through a discounted cash flow analysis yields an NPV, which can be used to assess valuation. In the 1990s, Procter & Gamble’s Product Supply Organization kicked off a major Reliability Engineering program, much like the efficiency initiatives of companies such as Toyota. MORE

When making big decisions, executives use familiar tools like discounted cash flow analysis far too often. That’s because the more uncertain a business context is, the less likely running some numbers and probabilities through a spreadsheet will be helpful. It’s much more useful to take a different approach: to build multiple qualitative scenarios, for example, or to develop a set of comparative reference cases. MORE

However, many investors seem to have concluded that the most successful companies with tens of billions of dollars of valuation today could never have justified their valuation at the start of their operation based on discounted cash flow. Business students are taught to value a company based on the discounted amounts of future cash flows or earnings. Martin Konopka/EyeEm/Getty Images. MORE

As Nick Robins from the bank HSBC described to the audience, in a scenario of global peak fossil fuel use by 2020 “implies a 44% reduction in discounted cash flow value of fossil fuel companies” — or in simpler terms, a decline in share price of 40 to 60 percent. Tackling climate change — and thus keeping the world inhabitable — is an achievable goal, but it will become prohibitively expensive if we wait to act. MORE