Terminal Value for IRR Calculation
I am calculating IRR from a 10 years projected cash flow + a terminal value. The terminal value I understand is usually calculated as FCFF(1+g)/(r-g). Incase of using terminal value for IRR calcuation should the r= cost of capital or r=IRR (in this case it will be iterative as its being used to calculate IRR itself). Please let me know the usual practice. Thanks.
Just use a firm-specific discount rate. But if this is for an LBO standard practice is to use a multiple - i.e. assuming you exit the investment in a certain year.
I have generally used the cost of equity (for basic company valuation), as opposed to WACC, as FCF in this situation is the FCF available to equity holders. Use a multiple if you're doing an LBO.
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