Terminal Value
This query is : Resolved
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.
Please explain in clear and simple language.
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.
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.
04 September 2010
I need answer with relation to MIRR method of capital budgeting.
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.
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
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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04 September 2010
Thnx for clearing my doubt.
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