How to Calculate Terminal Value in DCF (Simple Guide + Calculator)

When using the Discounted Cash Flow (DCF) method to value a business, one of the most important pieces is the Terminal Value — and it often makes up the majority of the total valuation.

Let’s walk through exactly what terminal value is, how to calculate it, and why it matters — with examples, a calculator, and an infographic to help you visualize it.

🙋‍♀️ What is Terminal Value?

Terminal Value (TV) estimates the value of a business beyond the forecast period — usually after 5 or 10 years — when projecting individual yearly cash flows becomes less reliable.

In simple terms:

It tells you what the business is worth after your detailed forecast ends.

There are two main ways to calculate it:

1. Gordon Growth Model (Perpetuity Method)
2. Exit Multiple Method

This article focuses on the more common Gordon Growth Model, used in most DCF calculations.

🧮 Terminal Value Formula

Here’s the Gordon Growth Formula for terminal value:

Terminal Value = (Final Year Cash Flow × (1 + g)) / (r − g)

Where:

• g = long-term growth rate (e.g., 2%–3%)
• r = discount rate (e.g., 10%–15%)
• Final Year Cash Flow = the last cash flow in your forecast period

🌐 Example

Let’s say:

• Final year cash flow = $500,000
• Growth rate (g) = 3%
• Discount rate (r) = 12%

Then:

TV = (500,000 × 1.03) / (0.12 − 0.03)
TV = 515,000 / 0.09 = $5,722,222.22

So the terminal value is approximately $5.72 million.

📘 Why Terminal Value Is So Important

• Often contributes 50%–80% of the total DCF value
• Reflects the ongoing value of a business after the detailed forecast ends
• A small change in g or r can dramatically affect the outcome — so choose them carefully!

🔁 Related Posts

• How to Calculate DCF