What does the term "terminal value" refer to in the context of financial models?

The term "terminal value" in financial models represents the value of an investment at the end of a specified forecast period, capturing the expected cash flow that will be generated beyond that period. It often reflects the anticipated ongoing profitability or asset value of a company after the explicit forecast period has concluded.

In practice, terminal value can be calculated using methods such as the Gordon Growth Model or the exit multiple approach, which project the future growth rates of cash flows or apply market multiples derived from comparable companies to assess what the business might be worth at that point in time. It's a crucial component in financial modeling because it significantly affects the overall valuation of an investment or company, particularly in discounted cash flow analyses where future cash flows are estimated and then discounted back to present value.

Other choices refer to different concepts: one option focuses on present value during the forecast period, which does not capture the extended value beyond that horizon; another option discusses future cash flows without specifically tying them to the terminal end-point context. Finally, the initial cash investment relates to the upfront costs of initiating a project, which is distinct from the valuation of future cash flows generated over time.