When calculating the profit potential of an idea, what does the entrepreneur should determine?
The profit potential of an idea is the net present value of all cash flows resulting from implementing the idea. This effectively equates to the "value" of the idea to the business. The first step in calculating this is to determine the sales likely from implementing the idea over the next 5-7 years or whatever the life of the idea. Subtracting relevant costs of the idea arrives at an estimate of the profit. This profit should then be adjusted for depreciation, interest, tax and finally adjusted back to present day values. Subtracting the total investment over the life of the project will determine the "net value" of the idea.