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So FCF = GCF - Delta NWC - CAPX Terminal Value Suppose our forecast horizon is 10 years so that our last cash flow is
So FCF = GCF - Delta NWC - CAPX Terminal Value Suppose our forecast horizon is 10 years so that our last cash flow is CF_t+10. Now we are forced to go by the presumption that the FCF will settle down to a constant value or more realistically to assume that FCF will grow at a constant rate e.g. at the rate of inflation. We can then compute the discounted present value of expected future FCFs for the years extending into the indefinite future. Suppose that the FCF grows at a rate g and r denotes a constant discount rate. Then Terminal Value in Year 10 = E_t [FcF_t + 10 (1 + g)]/r - g Terminal Value in year 0 = TV_Years 10/(1 + r)^10 It makes sense to limit the growth rate g to the rate of inflation unless one is sure the firm can subsequently install more efficient capital as old capital is replaced. Suppose that real growth is forecast to be 2% p.a. while inflation is forecast to be 4% p a. What would be the forecast of the growth rate of FCF
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