The [[valuation]] proceeds as follows.[http:<ref>Schumann (2006)<//www.cpschumannco.com/storeimages/MonteCarloArticle.pdf]ref> First, for each case, a [[Scenario_planning |scenario specific]], ''internally consistent'' forecast of [[cashflow]]s is constructed for the years leading up to the assumed [[Divestment#Divestment_for_financial_goals |divestment]] by the private equity investor; see [[Financial_modeling#Accounting| Financial modeling: Accounting]]. Next, a divestment price - i.e. [[Terminal value]] - is modelled by assuming an [[Terminal_value_(finance)#Exit_Multiple_Approach |exit multiple]] consistent with the scenario in question. (Of course, the divestment may take various forms - see [[Private_equity#Investments_in_private_equity| Private equity: Investments in private equity]].) The cash flows and exit price are then [[present value|discounted]] using the investor’s [[Required rate of return|required return]], and the sum of these is the value of the business under the scenario in question. Finally, the three values are multiplied through by a [[probability]] corresponding to each scenario (as estimated by the investor). The value of the investment is then the [[Weighted mean|probability weighted sum]] of the three scenarios.
The method is used particularly in the valuation of [[growth company|growth companies]] which often do not have historical financial results that can be used for meaningful [[comparable company analysis]]. Multiplying actual financial results against a comparable valuation multiple often yields a value for the company that is objectively too low given the prospects for the business.
