DCF Analysis - Terminal Value
Why do we discount terminal value? Based on the formula aint we already discounting the cash flows and then summing them up?
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Terminal Value is calculated at the end of your DCF period, so you have to discount it back to current day. To be clear, TV is supposed to be the value of all the cash flows you're not specifically projecting out. This can either be based on assuming you sell the business at end of the DCF period (the EBITDA multiple method) or assuming you own the business forever and calculating the PV at the end of the DCF period assuming the FCF is a growing annuity, but this is a PV at the end of your DCF period, so still needs to be discounted back to current day.
I'd recommend Rosenbaum textbook or Damodaran's work for a resource that explains this clearer.
So its the value at the end of the terminal year say year 5 and we discount it to the present - year 0?
yup
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