Hypothetical worked example and primary educational references; not observed market data.
Locate value beyond the explicit forecast
A continuing business may generate cash after an explicit forecast ends. Terminal value estimates that later stream under a chosen model. It is not a separate asset discovered by the calculation; it compresses assumptions about many future periods. A perpetual-growth model uses next-period cash flow divided by the difference between a discount rate and growth rate. The rates must be consistent and the discount rate must exceed growth in the simple formula. IFRS 13 provides valuation-assumption context rather than prescribing this investment model. The analytical task is to explain the implied continuing business before accepting the large number produced by the equation.
Supporting references: 1. IFRS Foundation: IFRS 13
Calculate a hypothetical endpoint value
Suppose net cash flow in the final explicit year is USD 100 long-run growth is assumed at 2%, and the discount rate is assumed at 8%. Next-year cash flow is 102. Terminal value at the final forecast date is 102 divided by 0.06, or 1,700. If that date is five years from now, dividing 1,700 by 1.08 raised to the fifth power gives a present value of 1,156.99. These are hypothetical inputs, not current rates or promises. Keeping endpoint value separate from present value prevents the common error of adding a future-date amount directly to today's discounted cash flows.
Supporting references: 1. IFRS Foundation: IFRS 13
Hypothetical worked example
Hypothetical growth-rate terminal sensitivity
Model setup
Read these assumptions before comparing the scenarios.
- All monetary amounts in this example are hypothetical U.S. dollars (USD), not current prices, quoted account terms or observed market data. Percentages, counts, time periods and index levels retain their stated units.
- Final explicit-year net cash is USD 100; discount rate is 8%.
- Growth alternatives are 2% and 3%; terminal date is five years ahead.
Present terminal value (USD)
- 2%1,156.99
- 3%1,402.00
Expanded scale, not zero-based; dots show small differences.
- Lowest displayed value
- 1,156.99
- Highest displayed value
- 1,402.00
Hypothetical cases from the table below, in the stated units. Not market observations, a forecast or a recommended choice. Read the scenario assumptions before comparing.
| Growth assumption | Next-year cash (USD) | Endpoint terminal value (USD) | Present terminal value (USD) |
|---|---|---|---|
| 2% | 102 | 1,700 | 1,156.99 |
| 3% | 103 | 2,060 | 1,402.00 |
Calculation details
- Two-percent endpoint value
- 1,700.00 USD at year five
((100 * (1 + 0.02)) / (0.080000000000000002 - 0.02)) - Two-percent present terminal value
- 1,156.99 present USD
(1700 / (1.0800000000000001 ^ 5)) - Three-percent present terminal value
- 1,402.00 present USD
(2060 / (1.0800000000000001 ^ 5))
Examine the rate spread
Changing assumed growth from 2% to 3% raises next-year cash to 103 and narrows the rate spread from six percentage points to five. Endpoint value rises to 2,060. The effect is large because growth changes both the numerator and denominator. This is a mathematical sensitivity, not evidence that the business can sustain either growth rate. As the growth assumption approaches the discount rate, the simple result becomes extremely sensitive and eventually unusable. A plausible-looking percentage can therefore create a fragile valuation. Test the spread explicitly and describe the business economics needed to support the continuing cash-flow assumption.
Supporting references: 1. IFRS Foundation: IFRS 13
Include the capital needed for growth
A terminal cash flow should be consistent with the investment required to sustain its assumed growth. Increasing growth while holding all reinvestment fixed can imply that the company expands without committing additional resources. That might be unsupported for a business requiring inventory, facilities, or customer acquisition spending. IAS 16 and cash-flow reporting concepts help identify investment and allocation, but the terminal reinvestment estimate remains an analytical judgment. Examine the implied operating margins, asset productivity, and capital needs together. A perpetual model is coherent only if its continuing cash generation can plausibly coexist with the resources necessary to produce it.
Supporting references: 2. IFRS Foundation: IAS 16 · 3. IFRS Foundation: IAS 7
Avoid a sudden unexplained steady state
The transition from the last explicit year to the terminal period can hide major assumptions. A model may forecast rapid growth, then instantly assume mature margins and low capital spending. That discontinuity can inflate terminal cash without a realistic transition. Describe how competitive conditions, capacity, and investment change as the business matures. If more transition years are required, extend the explicit forecast rather than forcing all adjustment into one terminal number. Exit-multiple terminal models have different dependencies, but they still need consistency with the final-year earnings and the selected comparable valuation basis. Changing the method does not remove uncertainty about the continuing business.
Supporting references: 1. IFRS Foundation: IFRS 13 · 2. IFRS Foundation: IAS 16
Report dependence on terminal assumptions
Show terminal endpoint value, its discounted present value, and the explicit-period value separately. If terminal assumptions dominate the result, say so. That dependence is not inherently wrong for a continuing business, but it makes long-run uncertainty especially material. The hypothetical cases isolate the growth-rate effect and do not include an actual company's competitive position or claims. A defensible conclusion explains what the terminal model assumes about cash, reinvestment, risk, and survival. It should not present 1,700 or 2,060 as a price target. Those numbers are conditional consequences of selected inputs, useful for testing reasoning rather than certifying a market outcome.
Supporting references: 1. IFRS Foundation: IFRS 13
Test another situationDeduct the reinvestment that supports continuation
A separate hypothetical case. Its inputs differ from the main worked example above.
Deduct the reinvestment that supports continuation
Suppose a hypothetical continuing business could produce USD 180 of annual operating cash before sustaining investment, with USD 60 of annual investment required to preserve the assumed cash stream. The first continuing-year net cash is USD 120. Under an illustrative 10% discount rate and zero perpetual growth, terminal value at the preceding year-end is USD 1,200. Capitalizing the pre-investment USD 180 instead would produce USD 1,800 and overstate this stipulated model by USD 600. These are endpoint values, not present values today. The trade-off is a simple steady-state formula against the need to define a genuinely sustainable net cash numerator.
Supporting references: 1. IFRS Foundation: IFRS 13
Check the transition into the continuing period
IFRS 13 supplies valuation-assumption context. Here, inspect whether the final forecast year contains temporary maintenance deferrals, abnormally low working capital, or an incomplete capacity build. A terminal formula applied to that unusual year can perpetuate the temporary cash boost. Reconcile the first continuing year to a stable operating state before applying the formula, and discount the endpoint consistently afterward. Zero growth does not mean zero replacement spending: assets may need renewal just to maintain output. If the business is expected to shrink or wind down, a finite rundown model may describe its obligations better than assuming indefinite stable cash.
Supporting references: 1. IFRS Foundation: IFRS 13
Check this case’s calculations
- Sustainable continuing cash
- 120.00 USD
(180 - 60) - Post-investment terminal value
- 1,200.00 USD
((180 - 60) / 0.10000000000000001) - Pre-investment terminal value
- 1,800.00 USD
(180 / 0.10000000000000001) - Overstatement from omitted reinvestment
- 600.00 USD
((180 / 0.10000000000000001) - ((180 - 60) / 0.10000000000000001))
Limits of this additional case
- The perpetual zero-growth stream and sustaining investment are hypothetical; neither establishes indefinite survival or actual replacement requirements.
Limits of this analysis
- The growth and discount assumptions are hypothetical, not current market inputs.
- Perpetual growth requires consistent reinvestment and a discount rate above growth.
- Terminal modeling cannot establish indefinite survival or a tradable market price.
Sources and scope
- IFRS Foundation: IFRS 13
Fair value uses market-participant assumptions including risk.
Scope: IFRS measurement context; does not prescribe investment models or market prices.. Reference accessed 2026-10-06.
- IFRS Foundation: IAS 16
Asset recognition, depreciation and carrying amounts.
Scope: IFRS overview; US GAAP and entity policies may differ.. Reference accessed 2026-10-06.
- IFRS Foundation: IAS 7
Cash flow presentation and the operating, investing and financing categories.
Scope: IFRS overview; classification details and US GAAP may differ.. Reference accessed 2026-10-06.
Illustrative calculations are not forecasts or personal recommendations. Editorial standards
