Discounting and terminal value
Discount factors, two terminal methods, reconciled.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: discounting and terminal value.Updated 30 September 2026
What it does
Where the forecast becomes a value. Each year’s free cash flow is discounted at the cost of capital; the years beyond the forecast are captured in a terminal value, computed either by growing the last cash flow in perpetuity or by applying an exit multiple to the last year’s earnings. A careful build restates each method as the other, so the two assumptions can be compared.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 23–25: Terminal growth rate, Exit multiple, EV / EBITDA, Mid-year convention (1 on, 0 off)
- Valuation, rows 6–11: Forecast year, Discount period (years), Discount factor, Unlevered free cash flow…
- Valuation, rows 14–19: Terminal value = FCF × (1 + g) / (WACC − g), Discount factor at end of final year, Present value of terminal value, Enterprise value…
- Valuation, rows 22–26: Terminal value = EBITDA × multiple, Present value of terminal value, Enterprise value, Terminal value, % of enterprise value…
What a reviewer looks for
- Growing the final-year cash flow one more time under one method and not the other.
- Discounting the terminal value by the wrong number of periods.
- A terminal share of value quoted without the reader being told it.
Learn it, then build it
Understand · Primer
DCF Valuation
Build · Lab · ~15 min
DCF Builder
Build a DCF by hand from revenue to a share price, know how much of it sits in the terminal value, and name the one assumption the answer hinges on.
Build · Lab · ~10 min
Reverse DCF
Read off the growth a share price already assumes, and say whether that is plausible before anyone asks.
Read · Guide · 12 min
How to Build a DCF Model: Build Order, Terminal Value and the Sanity Checks
Read · Guide · 8 min
DCF Interview Questions: The Ones That Actually Come Up
Vocabulary: DCF, Terminal Value.