1. What is Horizon Value?

Horizon Value (also known as Terminal Value) estimates the value of a business or project beyond the explicit forecast period. It's a critical component in discounted cash flow (DCF) analysis, representing the present value of all future cash flows when a stable growth rate is assumed.

2. How Does the Calculator Work?

The calculator uses the Horizon Value formula:

Where:

• \( CF \) — Cash flow in the final forecast period ($)
• \( g \) — Perpetual growth rate (decimal)
• \( r \) — Discount rate (decimal)

Explanation: This formula calculates the present value of all future cash flows growing at a constant rate in perpetuity, assuming the discount rate exceeds the growth rate.

3. Importance of Horizon Value Calculation

Details: Horizon Value is essential in business valuation, investment analysis, and financial modeling. It often constitutes a significant portion of the total valuation in DCF models, making accurate calculation crucial for informed decision-making.

4. Using the Calculator

Tips: Enter cash flow in dollars, growth rate and discount rate as decimals (e.g., 5% = 0.05). Ensure the discount rate exceeds the growth rate for valid results. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why must the discount rate exceed the growth rate?
A: If growth rate equals or exceeds discount rate, the denominator becomes zero or negative, making the result infinite or negative, which isn't economically meaningful.

Q2: What is a reasonable perpetual growth rate?
A: Typically between 2-3%, slightly above long-term inflation but below GDP growth to maintain economic realism.

Q3: How do I determine the appropriate discount rate?
A: The discount rate is usually the weighted average cost of capital (WACC) for companies or the required rate of return for projects.

Q4: Are there alternative methods to calculate terminal value?
A: Yes, the exit multiple method is another common approach that uses comparable company valuation multiples.

Q5: What are the limitations of this approach?
A: It assumes perpetual growth at a constant rate, which may not reflect real-world business cycles and economic changes over very long periods.