The Six-Minute Guide to Making Better High-Stakes Decisions

Harvard Business Review

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.

Why You Should Crowd-Source Your Toughest Investment Decisions

Harvard Business Review

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.

What Private Equity Investors Think They Do for the Companies They Buy

Harvard Business Review

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.

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How Corporate Investors Can Improve Their Odds

Harvard Business Review

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.

Hospital Budget Systems Are Holding Back Innovation

Harvard Business Review

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.

Why We Need to Update Financial Reporting for the Digital Era

Harvard Business Review

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.

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The Largest Risk (and Opportunity) Investors Are Ignoring

Harvard Business Review

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.

Why Sit on All that Cash? Firms Uncertain on Cost of Capital

Harvard Business Review

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.

Still Many Ways to Skin a Capital Cost

Harvard Business Review

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.

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Can We Quantify the Value of Connected Devices?

Harvard Business Review

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.