A presentation on Alcar

Approach of value based

management
By
Saud Khan
Gayak Gowda
Moinuddin Fahad
 Introduction
 ALCAR Approach is a VBM technique

 It is developed by ALCAR Group Inc., a management education and. software company, which is

based on discounted cash flow analysis.

 In this framework the emphasis is not on annual performance but on valuing expected performance.

 Here the valuation of the firm is based on its future cash flow and is the method closely related to
DCF (Discounted Cash flow Model) and NPV (Net Present Value)
 Steps Involved In Alcar Approach

 Forecast the operating cash flow stream for the business unit (strategy) over
the planning period.
 Discount the forecasted operating cash flow stream using the weighted
average cost of capital.
 Estimate residual value of the business unit (strategy) at the end of planning
period and fixed its present value.
 Determine total shareholders value.
 Calculate pre-strategy value.
 Determine value created by the strategy.
 Framework of Alcar Approach
Corporate
objective

Valuation Shareholders Management

components value decision

Value
drivers
 Steps analysis
Step 1 : Forecast the operating cash flow stream for the business unit
(strategy) over the planning period.

Operating annual cash flow is =

Cash inflow ((sales)(operating profit)(1-tax rate)}-cash outflow[fixed
capital investment + working capital investment)

Step 2 : Discount the forecasted operating cash flow stream using the
weighted average cost of capital

WACC = [(post tax cost of debt)(market value weight of debt)+(post tax

cost of equity)(market value weight of equity)]
Step 3 : Estimate residual value of the business unit (strategy) at
the end of planning period and fixed its present value
The residual value = perpetuity cash flow / cost of capital
Step 4 : Determine total shareholders value
Step 5 : Calculate pre-strategy value
Pre strategy value =
cash flow before new investment / cost of capital – market
value of the debt

Step 6 : Determine value created by the strategy.

Value created by the strategy =
total shareholder value – pre strategy value
 Importance of Alcar Approach
1. Conceptual analysis :
Alcar approach helps in proper analysis of data and employs the discounted cash flow
framework

2. Technological improvement :
Alcar approach has made available computer software's to analyze the data and understand the
strategy value.

3. Understand the value created by a strategy :

Through alcar approach we can analyze the value created by the strategy through calculating
total shareholders value with pre strategy value.
 Limitations of Alcar Approach
1. In alcar approach the profits are measured in terms of profit margin on sales
which is generally recognized that this is not a good index for comparison

2. It requires lot of technological in acquisitions

3. Sometimes the value of pre and post strategy might differ.

4. The steps provided by DCF model in alignment to alcar approach should only be
followed