Grant points out that they should use the discounted free cash flow technique for valuing New Tech, and, though he is aware of other methods, he feels that the dis- counted free cash flow approach is the most appropriate. Grant explains to the members of the management team the various steps involved in the process.

1. Determine the present value of the free cash flows New Tech expects over the next 5 years (FCF 5 NOPAT 2 investment in net operating working capital and fixed assets). 2. Determine the company's terminal value at the end of the 5 years and what that amount

is worth today. To calculate the terminal value, assume an 8% growth rate of the free

cash flows in perpetuity. 3. Calculate New Tech's estimated market value by adding these two amounts: the present

value of the free cash flows over the 5 years and the terminal value of the company at the end of the 5-year period.

Grant has determined that the appropriate risk-adjusted discount rate is 20%. Grant subjectively determined (with input from New Tech's management) the 20% discount rate based on estimated required rates of return, as well as economic-, industry-, and company-specific risk factor