In addition to using high discount rates for start-up companies, valuation analysts may use a multi scenario approach. One multi scenario approach begins by constructing alternative outcomes under different degrees of optimism about the future of the company. The approach next estimates a discounted cash flow value for each outcome, called a conditional value, and then weights each outcome according to a probability estimate of its likelihood of occurring. Often referred to as the First Chicago Approach, 1 this methodology frequently creates a table such as the one shown below, using the success percentages cited above:
|
Scenario |
Conditional value ($) |
Probability |
Weighted value ($) |
|---|---|---|---|
|
Very optimistic |
150,000,000 |
0.02 |
3,000,000 |
|
Optimistic |
80,000,000 |
0.08 |
6,400,000 |
|
Conservative |
20,000,000 |
0.20 |
4,000,000 |
|
Break even |
0 |
0.30 |
0 |
|
Pessimistic |
(25,000,000) |
0.40 |
(10,000,000) |
|
Weighted Average |
$3,400,000 |
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