What is the final cash flow in a typical DCF analysis?

What is the final cash flow in a typical DCF analysis?

• A. The sum of the final year's FCF and terminal value
• B. The final year's Net Income
• C. The terminal value alone
• D. The last year's FCF discounted to present value

Answer: (A)

In a DCF, you attach a terminal value to capture all cash flows beyond the projection period, so the final cash flow used in the analysis combines what the company actually generates in the last forecast year with the value of all future cash flows beyond that year. The terminal value represents the continuing value of the business and is added to the final year’s free cash flow to form the total cash flow at the end of the projection. When you compute value, you then discount both the final year’s cash flow and the terminal value back to present value and sum them with the earlier years’ discounted cash flows to get the enterprise value. That’s why the best answer is the sum of the final year's FCF and the terminal value. Net Income isn’t the cash flow you’d use in this step, and terminal value by itself isn’t a cash flow, while discounting only the last year's FCF ignores the ongoing value captured by the terminal value.

In a DCF, you attach a terminal value to capture all cash flows beyond the projection period, so the final cash flow used in the analysis combines what the company actually generates in the last forecast year with the value of all future cash flows beyond that year. The terminal value represents the continuing value of the business and is added to the final year’s free cash flow to form the total cash flow at the end of the projection. When you compute value, you then discount both the final year’s cash flow and the terminal value back to present value and sum them with the earlier years’ discounted cash flows to get the enterprise value. That’s why the best answer is the sum of the final year's FCF and the terminal value. Net Income isn’t the cash flow you’d use in this step, and terminal value by itself isn’t a cash flow, while discounting only the last year's FCF ignores the ongoing value captured by the terminal value.