Conclusion

In conclusion, this chapter discussed analytical methods in the valuation filter of the Step-Wise Approach to Value. Several tools—depending on the level of uncertainty—can be used to estimate future value created from a Strategic Alternative. Discounted cash flow analysis is an analytical method that can be applied to the evaluation of SAs where future cash flows can be predicted with relative certainty, primarily because information used to predict cash flows is abundant, highly relevant, and reflects a relatively stable environment. In situations that involve more uncertainty in the projection of future cash flows, financial modeling techniques can be used to achieve a more accurate estimate of future value. The techniques we learned include break-even analysis, sensitivity analysis, scenario analysis, and Monte Carlo simulation. They are valuable because they help us understand the uncertainty inherent in specific variables associated with a Strategic Alternative.