Terminal Value

Terminal value is the worth of your investment after a certain period of time. It is calculated by keeping factors like the current worth of asset, the rate of interests etc. In consideration yet assuming a stable rate of growth. Terminal value is sometimes also known as horizon value or continuing value. It is also used with the discounted cash flow (which calculates the firms worth for up to 3 to 5 years) to calculate the current worth of the firm or business. The terminal value of assets or of a company can be calculated beyond the time period of the discounted cash flow projection.

There are a few simple steps to calculate the terminal value. Start with confirming the interest rate applied to your investment and convert it into decimal figures. For example if the interest rate on annual basis 6% than the decimal value would be 0.006. After deriving the decimal value add a figure of 1 to it which would make it 1.006. Then decide the years you are calculating your terminal investment in the future for. It will help to assign an alphabet to each figure like I to indicate interest and y to indicate years. After getting these two figures on your calculator calculate the value of interest to the years power, that is ‘i^y’ which in your calculator might be given as ‘x^y’ function. After you derive this value multiply it with your original investment and it will give you the terminal value of your asset for the specified time period which in this case was 6 years.

The concept of terminal value also holds a few considerations. Any forecasting activity is subject to fluctuation and inaccuracy. It is very hard to certainly predict the economic conditions especially beyond a few years, so you cannot fully rely on it to be 100% true at the end of the period it was calculated for.