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  • Value Based Management BCG Approach

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    Avi Ahuja
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    This document introduces the concepts of value-based management according to the Boston Consulting Group approach. It discusses two foundational concepts: total shareholder return and total business return. Total business return is measured by cash flow return on investment and cash value added. Cash flow return on investment calculates the sustainable cash flow generated by a business as a percentage of cash invested in assets. Cash value added measures economic profit by removing accounting distortions. The document provides examples to illustrate how to calculate these metrics and compares them to other measures like economic value added.

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    This document introduces the concepts of value-based management according to the Boston Consulting Group approach. It discusses two foundational concepts: total shareholder return and total business return. Total business return is measured by cash flow return on investment and cash value added. Cash flow return on investment calculates the sustainable cash flow generated by a business as a percentage of cash invested in assets. Cash value added measures economic profit by removing accounting distortions. The document provides examples to illustrate how to calculate these metrics and compares them to other measures like economic value added.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    Download as pptx, pdf, or txt
    1K views14 pages

    Value Based Management BCG Approach

    Uploaded by

    Avi Ahuja
    This document introduces the concepts of value-based management according to the Boston Consulting Group approach. It discusses two foundational concepts: total shareholder return and total business return. Total business return is measured by cash flow return on investment and cash value added. Cash flow return on investment calculates the sustainable cash flow generated by a business as a percentage of cash invested in assets. Cash value added measures economic profit by removing accounting distortions. The document provides examples to illustrate how to calculate these metrics and compares them to other measures like economic value added.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 14

    Value based Management (BCG approach)

    Presented by:- Avinash Ahuja (11101) Jagdish Devjani (11111)

    Introduction

    Developed by Boston Consulting Group Two concepts at Foundation

    Total Share holders Return Total Business Return

    Performance matrix

    Cash flow return on investment (CFROI) Cash Value Added

    Total Share holder Return

    TSR, TBR and Value Drivers


    Total Business Return Total Shareholders return

    Capital Gains

    Free Cash flows

    Return on invested Capital

    Growth in Investments

    Measured as CFROI

    Total Business Return

    Value = Earnings * P/V ratio Value = Book value * M/B multiple Value = Free Cash flow / Cost of Capital Value = NPV of expected Cash flow

    Uses of TBR

    Strategic Planning Resource Allocation

    Incentive Compensation

    Resource Allocation Perspective


    Positive

    Question
    Current CFROI v/s Cost of Capital

    High Priority for Reinvestment

    0
    Do not Fund Negative Negative 0 Positive Question

    TBR of business plan v/s target TBR

    Cash Flow Return On Investment


    The sustainable cash flow a business generates in a given year as a percentage of cash invested in the firms assets.

    Illustration

    Particulars Initial Investment Fixed Assets Working Capital NOPAT Useful life Cost of Capital

    Amount (Rs.) 300000 250000 50000 21080 14 years 10%

    Annual Measurement of project


    Year 1 NOPAT
    Depreciation Cash Flow Economic depreciation Sustainable Cash Flow Book Capital CFROI (%) ROCE (%) ROGI (%)

    Year 2 21080
    17857 38937 8937 30000 300000 10.00 7.03 12.98

    Year 3 21080
    17857 38937 8937 30000 103573 10.00 20.35 12.98

    21080
    17857 38937 8937 30000 210715 10.00 10.00 12.98

    Comparison with IRR

    IRR works out to be 10% ROCE understates IRR initially and overstates in later years ROGI is 3% biased

    CFROI is equal to IRR throughout the life span

    Cash Value Added

    Another side showing measure of economic profit Better measure than EVA Removes accounting distortion

    CVA = Operating Cash flow Economic Depreciation Capital charge on Gross Investment

    Comparing EVA and CVA


    EVA Year 1 NOPAT 21080 Year 6 21080 Year 12 21080

    Book Capital
    Capital Charge (10%) EVA

    300000
    30000 (8920) CVA

    210715
    21072 8

    103573
    10357 10732

    NOPAT Depreciation

    21080 17857

    21080 17857

    21080 17857

    Cash flow Economic Depreciation


    Cash Invested Cost of Capital Capital Charge CVA

    38937 8937
    300000 10% 30000 0

    38937 8937
    300000 10% 30000 0

    38937 8937
    300000 10% 30000 0

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