> For the complete documentation index, see [llms.txt](https://help.modelreef.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.modelreef.io/help/financial-outputs-and-valuation/terminal-value-rules.md).

# Terminal Value Rules

This article explains how **terminal value** works in Model Reef.

You will learn:

* Why terminal value is needed in discounted cashflow models.
* How the multiple based method works.
* How the Gordon growth method works.
* How terminal value is combined with forecast cashflows.

Terminal value represents the value of cashflows beyond the explicit forecast horizon.

## 1. Why terminal value is required

Most models have a finite forecast period, for example five or ten years.

However, many businesses continue to operate beyond that horizon. Rather than forecasting every year individually, valuation models usually:

* Forecast detailed cashflows for a finite period.
* Use a **terminal value** to represent all cashflows after that period in a single number.

Model Reef allows you to configure this terminal value per model or scenario.

## 2. Multiple based terminal value

The **multiple method** applies a market or transaction based multiple to a chosen metric in the final forecast period.

{% stepper %}
{% step %}

### Select the metric

Choose a metric from the final forecast year, such as EBITDA, EBIT or FCFE.
{% endstep %}

{% step %}

### Choose the multiple

Select an appropriate market or transaction multiple (for example, 8× EBITDA).
{% endstep %}

{% step %}

### Compute the terminal value

Terminal value is computed as:

{% code title="Terminal value" %}

```
Terminal value = Metric in final period × Multiple
```

{% endcode %}

This terminal value is treated as a cashflow in the final period and then discounted back to the present using the relevant discount rate.
{% endstep %}
{% endstepper %}

## 3. Gordon growth terminal value

The **Gordon growth method** is normally applied to equity cashflows (FCFE).

{% stepper %}
{% step %}

### Identify final period FCFE

Use FCFE in the final explicit forecast period.
{% endstep %}

{% step %}

### Choose long run growth rate

Select a long run growth rate g that reflects long-term expectations.
{% endstep %}

{% step %}

### Use the equity discount rate

Identify the equity discount rate r to use in the formula.
{% endstep %}

{% step %}

### Compute the terminal value

Terminal value for a growing perpetuity is:

{% code title="Gordon growth terminal value" %}

```
Terminal value = FCFE in final period × (1 + g) ÷ (r − g)
```

{% endcode %}

This value represents the present value at the final period of a growing perpetuity of FCFE. It is then discounted back to today.

Gordon growth assumptions should be consistent with long run economic expectations.
{% endstep %}
{% endstepper %}

## 4. Treatment of terminal value inside the engine

Within the valuation engine:

* Terminal value is added to the last forecast cashflow as an extra inflow.
* The combined amount is then discounted back along with all earlier FCFF or FCFE cashflows.
* Reports can show the share of total value that comes from the terminal value versus the explicit forecast period.

This helps you judge whether a valuation is dominated by long run assumptions or by near term performance.

## Related articles

* [Venue-Level Forecasting Pack](/use-cases/hospitality-groups-multi-venue/venue-level-forecasting-pack.md)
* [Build a Variance Analysis Model](/how-tos/dashboards-and-reporting/build-a-variance-analysis-model.md)
* [Model Template Structure](/help/building-your-model/model-template-structure.md)
* [Scenario Toggle Rules](/syntax/chart-and-table-syntax/scenario-toggle-rules.md)