What is terminal value in a DCF?

Terminal value is the number that stands in for every year of cash flow past your explicit forecast window, usually about five years out. It typically drives 60 to 80 percent of total enterprise value, so one growth assumption or one multiple sitting far out does most of the work in the whole model.

What are the two ways to calculate terminal value?

Gordon growth takes the final forecast year's cash flow, grows it at a long-run rate near GDP of 2 to 3 percent, and divides by WACC minus that growth rate. The exit multiple applies a comps-based multiple like EV over EBITDA to the final-year metric. The two methods should roughly agree, and you cross-check them.

Do you discount terminal value back to today?

Yes, always. Terminal value is a lump sum sitting at the end of your forecast period, so it is a future number, not today's money. You discount it to present value alongside every other cash flow, then add it to the discounted explicit-year cash flows to reach enterprise value. Forgetting this overstates value massively.

DCF

Terminal value

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

5 min read · updated July 2, 2026

You can't forecast a company's cash flows forever. So you forecast maybe five years in detail, then you need a number that stands in for every year after that. That number is terminal value, and here's the part beginners miss: it's usually most of your answer.

In a typical DCF, terminal value is 60% to 80% of the total enterprise value. Read that again. The five years you sweated over in the model are the minority of the output. One growth assumption or one multiple, sitting way out past the forecast, does most of the work. That's why interviewers press on it.

Two ways to compute it

There are exactly two methods you need to know. Learn both, and know when each is used.

Method 1: Gordon growth (perpetuity growth)

You take the final forecast year's free cash flow, grow it at a small perpetual rate forever, and capitalize it:

$TV = \frac{FCF_n \times (1+g)}{WACC - g}$

Here $FCF_n$ is the last year of your explicit forecast, $g$ is the long-run growth rate, and $WACC$ is your discount rate. The logic: a stream of cash growing at a steady rate forever is worth the next year's cash divided by (discount rate minus growth). It's the value of a growing perpetuity.

The one judgment call is $g$ . It has to be a rate the company can sustain literally forever, so it's tied to the long-run growth of the whole economy. Think long-run GDP, roughly 2% to 3%.

Common mistake

Reaching for terminal value before you've solved for WACC. Look at the formula: WACC sits right in the denominator. You cannot compute a Gordon growth terminal value without it. The sequence is always project cash flows, solve WACC, then terminal value. And the second half of the same mistake: computing terminal value and then forgetting to discount it back to today. Terminal value is a lump sum sitting at the end of year 5. It is not today's money. You discount it back exactly like every other cash flow.

Method 2: Exit multiple

Instead of assuming perpetual growth, you assume you sell the business at the end of the forecast at a market multiple. Take the final-year metric (usually EBITDA) and apply a multiple pulled from comparable companies:

$TV = EBITDA_n \times \left(\frac{EV}{EBITDA}\right)_{\text{exit}}$

If final-year EBITDA is $200 and comparable companies trade at 8x EV/EBITDA, terminal value is $1,600. This method grounds your answer in what the market actually pays today, which is why bankers often lean on it in practice.

The two methods should agree, roughly. If they don't, one of your assumptions is off.

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Frequently asked

What is terminal value in a DCF?: Terminal value is the number that stands in for every year of cash flow past your explicit forecast window, usually about five years out. It typically drives 60 to 80 percent of total enterprise value, so one growth assumption or one multiple sitting far out does most of the work in the whole model.
What are the two ways to calculate terminal value?: Gordon growth takes the final forecast year's cash flow, grows it at a long-run rate near GDP of 2 to 3 percent, and divides by WACC minus that growth rate. The exit multiple applies a comps-based multiple like EV over EBITDA to the final-year metric. The two methods should roughly agree, and you cross-check them.
Do you discount terminal value back to today?: Yes, always. Terminal value is a lump sum sitting at the end of your forecast period, so it is a future number, not today's money. You discount it to present value alongside every other cash flow, then add it to the discounted explicit-year cash flows to reach enterprise value. Forgetting this overstates value massively.