A client explains that her firm’s value must be affected by the choice of explicit forecast horizon. Build a model to test her claim. NOPLAT, depreciation, and gross investment for year 1 have been forecasted to be $10.0, $2.5, and $13.61, respectively.

a. To evaluate your client’s claim, first assume a short horizon of three years.

b. Compare the results of this three-year horizon to a six-year forecasted horizon. The company’s management team forecasted RONIC for years 1 to 3 to be 18 percent and 11 percent thereafter. The company executives also forecasted NOPLAT to grow at 20 percent for years 1 to 3 and a decline to continuing growth rate of 5 percent thereafter. Finally, the management team has estimated an initial WACC of 14 percent for years 1 to 3, and declining to 12 percent after the initial forecasted period.

c. Compare your computed value for both time horizons. Provide an explanation of your results.