Horizon Value Calculator

How the Horizon Value Calculator Works and Why It Is Useful

The Horizon Value Calculator estimates the expected value of an investment or asset at a specific future date by projecting perpetual cash flows beyond a chosen horizon and discounting them using a required return. This value, often called the terminal value or horizon value, is essential in discounted cash flow (DCF) models and long-term financial planning.

The calculator uses three primary inputs: annual cash flow, required return rate, and growth rate. It applies a simple and widely used formula to convert projected cash flows into a single horizon value that represents the asset's worth at the end of the projection period.

Formula

HV = ACF / (RR - GR)

Where:

• HV = Horizon Value
• ACF = Annual Cash Flow
• RR = Required Return Rate (as a decimal)
• GR = Growth Rate (as a decimal)

Important Note: The required return rate must be greater than the growth rate for the calculation to be valid. If RR is less than or equal to GR, the horizon value becomes infinite or invalid.

How to Use the Calculator (Step by Step)

1. Enter the annual cash flow. This is the expected cash flow for the first year after the horizon. Example placeholder: 50000.
2. Enter the required return rate. Input the percentage required by investors, for example 12.5. The calculator treats this as a percent, so 12.5 means 12.5%.
3. Enter the growth rate. This is the expected perpetual growth rate of cash flows beyond the horizon, for example 5.0 for 5%.
4. Click Calculate. The tool converts the percentages to decimals and applies the horizon value formula.
5. Read the Result. The output shows the horizon value and a calculation breakdown including the difference used in the denominator.
6. If the calculator shows an error, check the rates. The message Invalid calculation: Required return must be greater than growth rate appears when RR is less than or equal to GR. Adjust inputs so RR > GR.

Fields and prompts

• Annual cash flow - Example: 50000
• Required return rate - Example: 12.5
• Growth rate - Example: 5.0

Practical Examples of Use

Below are examples that illustrate the calculation and typical applications. Each example includes a calculation breakdown to show how the formula is applied.

Example 1 - Basic calculation

Inputs:

• Annual cash flow: 50000
• Required return: 12.5%
• Growth rate: 5.0%

Calculation Breakdown:

• Convert rates to decimals: RR = 0.125, GR = 0.05
• Difference (RR - GR) = 0.125 - 0.05 = 0.075
• HV = 50000 / 0.075 = 666666.67

Result: Horizon value = 666,666.67. This result is useful when estimating the terminal value for a growing business in a DCF model.

Example 2 - High annual cash flow, low growth gap

Inputs:

• Annual cash flow: 200000
• Required return: 8.0%
• Growth rate: 6.0%

Calculation Breakdown:

• RR = 0.08, GR = 0.06
• Difference (RR - GR) = 0.02
• HV = 200000 / 0.02 = 10,000,000

Result: Horizon value = 10,000,000. When the required return is only slightly above the growth rate, the horizon value becomes very large. This highlights the sensitivity of terminal value to the difference between RR and GR.

Example 3 - Invalid scenario (RR <= GR)

Inputs:

• Annual cash flow: 100000
• Required return: 4.0%
• Growth rate: 4.0%

Calculation Breakdown:

• RR = 0.04, GR = 0.04
• Difference (RR - GR) = 0.00

Result: Invalid calculation: Required return must be greater than growth rate. Adjust the required return or the growth rate to obtain a valid horizon value.

Practical applications

Business Valuation

Use horizon value to estimate terminal value for companies with predictable cash flow growth. This is especially important in mergers and acquisitions and when valuing growing firms where perpetual growth is assumed.

Investment Analysis

Investors can evaluate long-term projects by estimating the horizon value based on sustainable growth and required returns. It helps compare projects with different growth profiles and investment horizons.

Project Evaluation

Managers can use the horizon value to determine whether strategic expansions or long-term projects create sufficient terminal value to justify initial investment and operational costs.

Conclusion and Benefits

The Horizon Value Calculator is a straightforward and powerful tool for converting projected annual cash flows into a single terminal value that reflects long-term expectations. Key benefits include:

• Speed and clarity: compute terminal values quickly with a simple formula.
• Consistency: apply the same assumptions across scenarios to compare investments fairly.
• Sensitivity insight: understand how small changes in return or growth rates can dramatically affect horizon value.
• Decision support: use the horizon value in DCF models and feasibility studies to support investment, acquisition, and strategic decisions.

Use the Horizon Value Calculator when you need a reliable, repeatable estimate of future value at a specified horizon. Always check that the required return rate exceeds the growth rate before trusting the result.