What Is a Terminal Analyst?

Discounted Cash Flow Method

One of the most commonly used valuation methods is the discounted cash flow method, in which the analyst discounts the sum of future cash flows to the present-day value. Because inflation causes the value of a dollar to decrease, you must discount future dollar amounts to better understand how much they are worth in today's figures. Therefore, the analyst predicts the future cash inflows from a project or business and discounts them to the value they would be worth today. He then presents the sum of these valuations to the inquiring party, who determines if the project is worth undertaking or the business worth purchasing or pursuing.

After a certain amount of time, which is unique to each project or business, an analyst cannot reasonably calculate or predict the cash flows for each year. Economic, financial and consumer demand changes are more likely to occur in an unpredictable nature further in the future. Beginning at the point at which the analyst feels his predictions would no longer be reasonably accurate, he uses a terminal value, which is a single lump sum that represents all of the subsequent years' cash flows. This valuation method employs a formula that predicts that after a certain period the growth rate of the company will stabilize.

Depending on the complexity of the job that the company is asking an analyst to perform, it might be necessary to have more than one person calculate separate variables. One analyst calculates the initial period of growth or production, during the years in which the business is likely to experience the greatest amount of volatility. Another analyst solely performs duties related to calculating the terminal value, which could mean calculating the formula to produce different values, depending on different scenarios. This person is the terminal value analyst.

If the company decides to undertake the growth or project at hand, then the terminal value will cease to remain the same. As time passes, the financial scenario and predictions will change or become actual financial data and the time at which estimations cease to be accurate is pushed further into the future. This means that the analyst will have to conduct new calculations based upon the new information. Therefore, the job of the terminal value analyst does not cease to exist once the company decides to go forward with the project.