Finite life asset
DCFAn asset with a defined end date, where a perpetuity terminal value is wrong in principle rather than merely aggressive.
Also written: finite life, defined life asset
Some assets stop. A mine exhausts its reserves, a production or spectrum licence expires, a concession reverts to the grantor, a drug loses exclusivity, a power purchase agreement runs out. For all of these the going concern assumption underneath a perpetuity does not hold.
Capitalising the final forecast year of one of these into perpetuity values decades of output that will not exist. Because terminal value is normally the majority of a DCF, the mistake is not a refinement, it dominates the answer.
The correct structure is to forecast to the end of the defined life and put a residual at the end. That residual is sometimes a sale of remaining assets, and for mines and offshore fields it is frequently a decommissioning and restoration outflow, so a terminal figure that is legitimately negative.
This is also why reserve life, licence expiry and patent expiry are the first questions asked in the relevant sectors. They are not sector trivia, they set the length of the model, and getting them wrong invalidates everything downstream of the forecast.
Worked example
A mine has twelve years of proved and probable reserves. A generic model forecasts five years and capitalises year five at 2% growth in perpetuity.
That values roughly a century of production from an asset with twelve years of it, so the terminal value is not conservative or aggressive, it is describing a different asset.
The right build runs twelve years of production, then a decommissioning and site restoration outflow, discounted like any other cash flow.