Terminal value is the sum of all cash flows from an investment or project beyond a forecast period based on a specified rate of return.
Terminal value is a significant factor in gauging cash flow.
Formula to calculate terminal value.
FCF = free cash flow
g = perpetual growth rate of FCF
WACC = Weighted average cost of capital
Example:
Assuming the WACC is 10% and the perpetual growth of free cash flow is 4%, if the forecast shows that 2020 free cash flow will be $60. Calculate the terminal value as at 2018.
Therefore, the terminal value as at 2018 was $1,040.
