# What is the terminal value?

Computes the terminal value of a discounted cash flow (DCF) forecast by the Gordon growth (perpetuity growth) model or an exit multiple, and its present value today.

- Page: https://www.acalculator.org/finance/terminal-value-calculator
- JSON spec: https://www.acalculator.org/finance/terminal-value-calculator.json
- Version: 52efe24b2b9f

## Default answer

Example with the default inputs (Method Perpetual growth (Gordon), Cash flow in the final forecast year $1,000,000.00, Perpetual growth rate 2.5%, Discount rate 9%, Years to the final forecast year (n) 5): At a 9% discount rate, the terminal value is $15,769,230.77, worth $10,248,918.01 today.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| method | Method | Grow the last cash flow forever at a steady rate, or apply a multiple to the last year’s metric. |
| cf | Cash flow in the final forecast year | The free cash flow (or dividend) of year n, the last year you forecast. |
| g | Perpetual growth rate | The yearly rate the cash flow grows forever after year n. It must be below the discount rate. |
| metric | Final-year EBITDA (or other metric) | The figure the multiple applies to in year n, for example EBITDA. |
| multiple | Exit multiple | What a buyer would pay per dollar of the metric, such as the EV ÷ EBITDA of similar companies. |
| r | Discount rate | The yearly rate used to value future cash, such as the weighted average cost of capital (WACC). |
| n | Years to the final forecast year (n) | Years from today to the end of the forecast. The terminal value is discounted over these years. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| tv | Terminal value (in year n) | The value at the end of year n of every cash flow after it. |
| pv | Present value of the terminal value | Terminal value ÷ (1 + discount rate)ⁿ. |
| next | Cash flow in year n + 1 | Final-year cash flow × (1 + growth rate). |
| implied | Implied multiple of the final cash flow | Terminal value ÷ final-year cash flow = (1 + g) ÷ (r − g). |

## Method

Gordon growth: TV = CFₙ × (1 + g) ÷ (r − g), with r > g; exit multiple: TV = metricₙ × multiple; present value = TV ÷ (1 + r)ⁿ.

## Assumptions

- After year n the cash flow grows at the same rate forever (Gordon growth), or the business sells at the typed multiple (exit multiple).
- Rates are yearly; the terminal value is at the end of year n and is discounted over n whole years.
- Arithmetic is exact on the typed decimals; the discount power is a floating-point power.

## Worked examples

1. method = growth, cf = $25.79, g = 5%, r = 12%, n = 5 gives tv = $386.91, pv = $219.54, next = $27.08. Source: OpenStax, Principles of Finance, 11.2 Dividend Discount Models (DDMs) (constant growth: value = D₀(1 + g) ÷ (r − g) = D₁ ÷ (r − g), which needs r > g; terminal value at the end of a high-growth phase: D(N+1) ÷ (r − g); Lore Ltd: $386.91 at the end of year 5, worth $219.54 today at 12%). https://openstax.org/books/principles-finance/pages/11-2-dividend-discount-models-ddms.
2. method = growth, cf = $5.00, g = 4%, r = 8%, n = 0 gives tv = $130.00, pv = $130.00, next = $5.20, implied = 26. Source: OpenStax, Principles of Finance, 11.2 Dividend Discount Models (DDMs) (constant growth: value = D₀(1 + g) ÷ (r − g) = D₁ ÷ (r − g), which needs r > g; terminal value at the end of a high-growth phase: D(N+1) ÷ (r − g); Lore Ltd: $386.91 at the end of year 5, worth $219.54 today at 12%). https://openstax.org/books/principles-finance/pages/11-2-dividend-discount-models-ddms: D₁ = 5.20 and the value is $130.00.
3. method = multiple, metric = $2,000,000.00, multiple = 8, r = 10%, n = 5 gives tv = $16,000,000.00, pv = $9,934,741.17. Source: OpenStax, Principles of Finance, 11.1 Multiple Approaches to Stock Valuation (EV/EBITDA = enterprise value ÷ EBITDA, applied through comparable companies and precedent transactions). https://openstax.org/books/principles-finance/pages/11-1-multiple-approaches-to-stock-valuation.

## FAQ

### What is terminal value?

Terminal value is the value, at the end of a forecast, of all the cash flows after it. A DCF valuation forecasts a few years one by one, then sums up every later year in one terminal value, because no one can forecast each year forever.

### How do I calculate terminal value with the Gordon growth model?

Grow the final-year cash flow by one year at the perpetual growth rate, then divide by the discount rate minus the growth rate: TV = CFₙ × (1 + g) ÷ (r − g). Lore Ltd’s year 5 dividend of 14 × 1.13⁵ = $25.7940925102, growing 5% a year at a 12% required return, gives 25.7940925102 × 1.05 ÷ 0.07 = $386.91. Rounded first to $25.79, it gives $386.85.

### How do I calculate terminal value with an exit multiple?

Multiply the final-year metric by the multiple a buyer would pay for it, usually EBITDA times an EV ÷ EBITDA multiple taken from similar companies or recent sales. $2 million of EBITDA at 8 times is a terminal value of $16 million.

### Why must the discount rate be higher than the growth rate?

The Gordon formula adds up a cash flow that grows by g and is discounted by r every year forever. When g is at or above r, the later years are worth as much or more than the early ones, the sum has no limit, and the formula gives a meaningless answer. The page asks for r above g.

### Why discount the terminal value?

The terminal value is a value at the end of year n, not today. Divide it by (1 + r)ⁿ before adding it to the present value of the forecast years. Lore Ltd’s $386.91 at the end of year 5 is worth 386.91 ÷ 1.12⁵ = $219.54 today.

### How much does the growth rate matter?

A lot, when it is close to the discount rate, because it sits in the denominator. At a 9% discount rate, the terminal value is 15.8 times the final cash flow at 2.5% growth and 20.8 times at 4%. Check the implied multiple the page shows against the multiples that similar businesses sell for.

## Sources

- OpenStax, Principles of Finance, 11.2 Dividend Discount Models (DDMs): constant growth value = D₀(1 + g) ÷ (r − g) = D₁ ÷ (r − g), which needs r above g; terminal value at the end of a high-growth phase = D(N+1) ÷ (r − g); the $5.00 dividend growing 4% at 8% is worth $130.00; Lore Ltd’s terminal value of $386.91 at the end of year 5 is worth $219.54 today at 12%. https://openstax.org/books/principles-finance/pages/11-2-dividend-discount-models-ddms (retrieved 2026-10-18)
- OpenStax, Principles of Finance, 11.1 Multiple Approaches to Stock Valuation: EV/EBITDA = enterprise value ÷ EBITDA, applied through comparable company analysis and precedent transactions. https://openstax.org/books/principles-finance/pages/11-1-multiple-approaches-to-stock-valuation (retrieved 2026-10-18)