When calculating the present value of terminal value, which year should you use to represent the discount period?

When calculating the present value of the terminal value in a discounted cash flow (DCF) analysis, it's important to understand the context of the forecast periods. The terminal value represents the value of the business beyond the explicit forecast period, usually calculated at the end of the last forecast year.

Utilizing the last year of the explicit forecast period as the discount period for the terminal value reflects the timing of when the terminal value is estimated. Since the terminal value is often derived using methods like the Gordon growth model or exit multiple method at the end of this forecast period, it embodies the value at that specific moment in time. Consequently, when discounting this terminal value back to its present value, it should be discounted from the end of the explicit forecast period. This ensures you're accurately reflecting when the value is assumed to be calculated, maintaining consistency with the timeline of cash flows and valuation analysis.

Choosing this reasoning allows you to appropriately align the value calculated at the end of the forecast with the correct timeline for discounting back to present value.