Analysts often value companies by forecasting a series of cash flows and then estimating a horizon value. Suppose a firm forecasts a project's net cash flows ($millions)in years 1 through 4 as $120, $130, $135, and $137, respectively. If the project ends at the end of the fourth year, what is the horizon value of the project? Assume that the company had a historical growth rate of 3 percent and has a discount rate of 10 percent.
A)$0.00
B)$1.37
C)$1.96
D)$4.87

Question

Quizplus · Accepted Answer

Since the project ends at the end of the fourth year, there are no future cash flows beyond this point to estimate a horizon value from. The horizon value is calculated based on the expectation of future cash flows beyond a certain point, typically using a perpetual growth model or exit multiple. In this scenario, with no cash flows beyond year 4, the horizon value is $0.00.

Analysts Often Value Companies by Forecasting a Series of Cash