Definition
Terminal value represents the value of cash flows beyond the explicit forecast period in a DCF. It often contributes a large share of enterprise value.
Formula
Terminal value (perpetuity) = FCF_(n+1) / (discount rate - terminal growth)
Example
If next year's FCF is $6M, discount rate is 12%, and terminal growth is 3%, terminal value = $6M / (0.12 - 0.03) = $66.7M (before discounting it back to today).
Common mistakes
- Letting terminal value dominate without sensitivity analysis.
- Using aggressive terminal growth that implies implausible long-run scale.
Measured as
Terminal value (perpetuity) = FCF_(n+1) / (discount rate - terminal growth)
Misused when
- Letting terminal value dominate without sensitivity analysis.
- Using aggressive terminal growth that implies implausible long-run scale.
Operator takeaway
- Tie Terminal Value to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Quantify the impact with DCF Valuation Calculator if you need to turn the definition into an operating assumption.
- Read DCF valuation: forecast cash flows, discount rate, and terminal value if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
Where to use this on MetricKit
Calculators
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- DCF Sensitivity Calculator: Estimate how enterprise value changes with discount rate and terminal growth assumptions (simple 3x3 sensitivity).
Guides
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.
- WACC explained: how to estimate a discount rate for DCF: A practical guide to WACC: what it is, how to compute it, and how to use it (carefully) as a DCF discount rate.
- Discount rate: how to choose it for NPV and DCF: A practical guide to discount rates: what they mean, how to choose a rate (WACC vs MARR), and how to avoid common mistakes.
- DCF sensitivity guide: WACC, terminal growth, valuation: How to run a DCF sensitivity table, choose defensible WACC and terminal growth ranges, and judge whether valuation is robust.
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.