What percentage of the present value is generally accounted for by terminal value in a DCF?

In a discounted cash flow (DCF) analysis, the terminal value often represents a significant portion of the total present value of a business. It is used to estimate the value of the business beyond the explicit projection period, capturing the value of all future cash flows that are expected to occur indefinitely thereafter.

Typically, research and actual analyses show that the terminal value can account for approximately 50% of the total present value. This is because, as companies mature, the cash flows that they generate are often expected to grow steadily for an indefinite period, leading to a substantial valuation component attributed to the terminal value.

The assumption that the terminal value constitutes about half of the total present value reflects the expectation of growth and the perpetuity of cash flows. This value is particularly important when considering long-term investments, as it helps capture the enduring nature of a firm’s cash-generating capabilities.

In summary, the reason why approximately 50% is generally associated with terminal value in DCF models is due to its role in encapsulating the ongoing potential of a firm to generate cash flows beyond the forecast period, making it a vital aspect of total company valuation.