Steady state
DCFThe condition a business must reach by the end of the forecast: stable growth, stable margin, and reinvestment consistent with both.
Terminal value assumes the final year repeats forever, growing at a constant rate. That is only legitimate if the final year is genuinely representative, which means growth has faded to something sustainable and margins have settled.
So the explicit forecast has a job beyond forecasting: it must transition the business from where it is today to a defensible steady state. A forecast still showing 20% growth and expanding margins in the final year cannot be capitalised.
Reinvestment has to be consistent too. A steady state growing at 2.5% needs capital expenditure above depreciation and some working capital investment; a terminal year with capex equal to depreciation is describing a business with no real growth.
If the business has not reached steady state by the end of the forecast, the answer is to extend the forecast rather than to capitalise something transitional.
Worked example
A forecast ends with 18% growth, expanding margins and capex at half of depreciation.
None of that can be capitalised. Terminal value assumes the final year repeats forever, and this year is plainly transitional.
Either extend the forecast until growth has faded and capex has converged toward depreciation, or the terminal value is capitalising a moment rather than a steady state.