Discount factor formula terminal value is a financial calculation that determines the present value of a future cash flow, taking into account the time value of money and the applicable discount rate. For instance, if you invest $100 today at a 5% annual interest rate, the $100 would be worth $105 at the end of the year.
The concept is crucial in evaluating long-term investments, as it helps compare the value of future cash flows at different points in time. Its benefits include enabling informed decision-making and risk assessment. A significant historical development was the introduction of computer spreadsheets, which made it easier to calculate terminal values.