Terminal value is a value of the business (or other asset) used in discounted cash flow (DCF) method that is added after the discontinuing of the cash flow forecasting.
DCF valuation is based on the sum of free cash flow which is discounted to the current value. If we could predict the cash flow of the future forever, then we won’t be needed for terminal value but the problem is that most of the times it is very hard to predict the cash flow for a longer period than five years. However, when forecasting period stops, the residual assets (basically business) are still valuable and that value is equal to terminal value.
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