Definition of Terminal Value
Terminal value refers to the present value of perpetual free cash flows assuming a constant growth forever at a given rate of return. It is used while assessing the viability of a project that involves perpetual cash flows after a certain period.
The formula for terminal value is
Example of Terminal Value:
A project that has initial cash outflow of $5 million, offers $250,000 for fist 20 years and after that, the cash flows are expected to grow at 3% per year and the required cost of capital is 15%. The terminal value, in this case, will be
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