How to Calculate the Terminal Value of an Investment

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Terminal value of an investment allows an investor to estimate how much an investment will be worth at the end of the term.
Terminal value of an investment allows an investor to estimate how much an investment will be worth at the end of the term. (Image: Calculator image by Alhazm Salemi from Fotolia.com)

The terminal value of an investment uses the same formula as compounding interest formula. The terminal value is how much an investment will be worth at the end of the investment. The terminal investment formula assumes an interest rate return on the investment for the period. On a bank account, the interest is always disclosed by the bank, but for some investments where the interest rate is unavailable, the investor can estimate or assume an interest return.

Determine the current value of the investment, the assumed interest rate the investment will earn and how long the investor plans to keep the investment. For instance, an investor buys $500,000 worth of stock. The investor expects a return on the investment of 5 percent each year. The investor wants to keep the investment for seven years.

Add one to the interest rate. In our example, 1 plus 0.05 equals 1.05.

Raise one plus the interest rate to the power of the number of periods the investment is held for. In our example, 1.05 raised to the power of 7 equals 1.4071. This is the interest factor.

Multiply the interest factor by the present value of the investment. In our example, $500,000 times 1.4071 equals a terminal value of $703,550.22.

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