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How to Calculate Terminal Value.
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How to Calculate Terminal Value.

Rosemary Njeri

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.

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.

Calculate Terminal Value.

Therefore, the terminal value as at 2018 was $1,040.

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