Terminal Value

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Faiz Ahmed (Querist)
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04 September 2010 What is meant by terminal value of cash inflow in relation to modified internal rate of return method of capital budgeting?

Please explain in clear and simple language.

Thrissurkkaran Ishtan

Thrissurkkaran Ishtan (Expert)
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04 September 2010 Terminal value can be viewed as the sale value of the business at end of the evaluation period. Also called exit value.

In project evaluations we assume that we start a business with an investment (outflow) and end the business by selling the same (inflow).

Normally terminal value is taken as 8 to 10 times the value of cashflow profit at the end of evaluation period.

Faiz Ahmed

Faiz Ahmed (Querist)
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04 September 2010 I need answer with relation to MIRR method of capital budgeting.

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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04 September 2010 Terminal value – The value of a asset at sale or realise, typically its par value, or the value of an asset on some specified future valuation date.

Thrissurkkaran Ishtan

Thrissurkkaran Ishtan (Expert)
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04 September 2010 In MIRR, the cash inflows from Year 1 onwards are valued forward to get a terminal value.

So if you make a profit of Rs. 100 at the end of year 1 and your cost of capital is 10% then its terminal value at the end of year 2 is Rs. 110 being 100 + (100 X 10%). Its terminal value at the end of year 3 is Rs. 122.10 and so on and so forth. All cashflows of subsequent year to be valued forward like this and added together to get a gross terminal value.

This way you get one terminal value (end of project term - inflow )and one investment value (zero year - outflow). You can now calculate the MIRR

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Faiz Ahmed

Faiz Ahmed (Querist)
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04 September 2010 Thnx for clearing my doubt.

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