what is terminal value tv 
terminal value tv is the value of an asset business or project beyond the forecasted period when future cash flows can be estimated terminal value assumes a business will grow at a set growth rate forever after the forecast period terminal value often comprises a large percentage of the total assessed value investopedia theresa chiechiunderstanding terminal valueforecasting gets murkier as the time horizon grows longer this holds true in finance as well especially when it comes to estimating a company s cash flows well into the future at the same time businesses need to be valued to solve this analysts use financial models such as discounted cash flow dcf along with certain assumptions to derive the total value of a business or project discounted cash flow dcf is a popular method used in feasibility studies corporate acquisitions and stock market valuation this method is based on the theory that an asset s value equals all future cash flows derived from that asset these cash flows must be discounted to the present value at a discount rate representing the cost of capital such as the interest rate dcf has two major components forecast period and terminal value 1 analysts use a forecast period of about three to five years anything longer than that and the accuracy of the projections suffer this is where calculating terminal value becomes important however this period is often longer for certain industries like those involved in natural resource extraction two commonly used methods to calculate terminal value are perpetual growth gordon growth model and exit multiple the former assumes that a business will continue to generate cash flows at a constant rate forever while the latter assumes that a business will be sold for a multiple of some market metric investment professionals prefer the exit multiple approach while academics favor the perpetual growth model there are several terminal value formulas like discounted cash flow dcf analysis most terminal value formulas project future cash flows to return the present value of a future asset the liquidation value model or exit method requires figuring out the asset s earning power with an appropriate discount rate and then adjusting for the estimated value of outstanding debt the stable perpetuity growth model does not assume the company will be liquidated after the terminal year instead it assumes that cash flows are reinvested and that the firm can grow at a constant rate into perpetuity the multiples approach uses the approximate sales revenues of a company during the last year of a discounted cash flow model then uses a multiple of that figure to arrive at the terminal value without further discounting applied 2the gordon growth model is named after myron gordon an economist at the university of toronto who worked out the basic formula in the late 1950s 3types of terminal valuediscounting is necessary because the time value of money creates a discrepancy between the current and future values of a given sum of money in business valuation free cash flow or dividends can be forecast for a discrete period but the performance of ongoing concerns becomes more challenging to estimate as the projections stretch further into the future moreover it is difficult to determine when a company may cease operations 2to overcome these limitations investors can assume that cash flows will grow at a stable rate forever starting at some point in the future this represents the terminal value terminal value is calculated by dividing the last cash flow forecast by the difference between the discount and terminal growth rates the terminal value calculation estimates the company s value after the forecast period assuming cash flows will grow at a constant rate forever the formula to calculate a firm s terminal value is 