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Terminal Value in NPV Calculation
For any project, we used to find out the free cash flows for teh projection period of say 20 years. Also we calculate teh Terminal Value at the end of 20 years as ((Last Year Cash Flow/(WACC-growth rtae)). NPV of thus arrived Terminal value become the most contributor in the total NPV of teh project, may be more than 70%. Does it means that Project's NPV derives from an Uncertain Cashflow at the end of 20 years? Can anybody to explain this please
Tags: npv, terminal value
Replies to This Discussion
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Permalink Reply by Noufal on -
Dear Reji
can i sugest you a samll correction in calculation of termainal value ?
in my opinion cashflow for terminal value will be taken as 21th year cash flow (20th year cash flow *(1+growth rate))
eventhough Terminal value is the major part of cash flow , it does not mean NPV derives from uncertain cashflow at the the end of 20 years
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Permalink Reply by REJI VARGHESE on
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Dear Noufal,
Thanks for the reply. One of my boss who is an Economist and his view point is that the NPV of the terminal value should contribute not more than 30-40% of the total NPV of the project. But in my model it shows 81%. He says this means the project NPV is overdepend on the Terminal value which may we recieve after 20 years. How I can defend my stand? Please help me
Thank you in Advance.
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