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. To evaluate your client's claim,

first assume a short horizon of three years. Compare the results of this three-year horizon to a five-year forecasted horizon. The company's management team forecasted ROIC for years 1-3 to be 18 percent and 11 percent after that period. The company executives also forecasted NOPLAT to grow at 20 percent for years 1-3 and a decline to continuing growth rate of 7 percent thereafter.

Depreciation in year t = 25% of NOPLAT in year t. Finally, the management team has estimated an initial WACC of 14 percent for years 1-3, and declining to 12 percent after the initial forecasted period. Compare your computed value for both time horizons. Provide an explanation of your results. (Hint: Firm value using the 3-year horizon should equal the firm value using the 5-year horizon.).

Gross investment for any year is NOPLAT (g/ROIC) + Depreciation.

• The CV is the present value of the first year's CV base free cash flow, NOPLAT * (1 - g/ROIC), discounted as a growing perpetuity: NOPLAT (1 - g/ROIC)/(WACC - g) for years 4+ (or years 6+ for the five-year horizon). Remember to discount CV back to time zero to find the present value.
• FCF = NOPLAT + Depreciation - Gross Investment.

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