Terminal value

A discounted cash flow forecasts cash flows for a handful of years, but a company does not stop generating cash at the end of that window. Terminal value captures everything beyond the explicit forecast, either as a perpetuity growing at a steady rate or by applying an exit multiple to a final-year metric.

Terminal value is frequently the largest single component of a DCF, which is also its weakness: small changes in the assumed long-run growth rate or WACC swing the result substantially. For young companies this sensitivity is severe, so practitioners lean on scenario methods such as First Chicago and the venture capital method, which anchor on an exit rather than a perpetuity.

See DCF and the VC Method for how terminal value fits the income approach.