Terminal Value Calculator (Gordon Growth)
Calculate the terminal value of a business with the Gordon perpetuity-growth model and discount it back to present value.
How it works
Terminal value = CF × (1 + g) ÷ (r − g) · Present value = TV ÷ (1 + r)^years
The terminal value captures every cash flow beyond an explicit forecast, assuming they grow at a steady rate forever. The Gordon growth formula divides next year’s cash flow by the discount rate minus the growth rate — the perpetuity math only works when the discount rate is larger than the growth rate. Terminal value often makes up the majority of a DCF valuation, so small changes in the growth or discount assumption move it a lot.
Worked example
A $1,000,000 final-year cash flow growing 2.5% forever, discounted at 9%, gives a terminal value of 1,000,000 × 1.025 ÷ (0.09 − 0.025) = 1,025,000 ÷ 0.065 = $15,769,231. Discounted back 5 years at 9%, its present value is about $10,249,000.
Frequently asked questions
Why must the discount rate exceed the growth rate?
If growth equalled or exceeded the discount rate, the perpetuity would sum to infinity because each future cash flow would shrink too slowly (or grow) in present-value terms. A sustainable perpetual growth rate is always below the discount rate.
What growth rate should I use?
A perpetual growth rate should not exceed the long-run growth of the broader economy — often 2–3%. A company cannot outgrow the whole economy forever, so higher figures overstate the terminal value.
Why is terminal value so important in a DCF?
Because it captures all cash flows past the forecast horizon, it frequently accounts for 60–80% of a company’s total DCF value, making the terminal assumptions the most sensitive part of the model.
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Educational estimate, not investment advice. Trading forex, futures and options carries substantial risk of loss.