Terminal value

You cannot forecast forever, so a DCF forecasts explicitly for five or ten years and captures everything after that in one number. That number is the terminal value, and it typically accounts for two thirds or more of the total, which is why so much interview attention lands on it.

There are two standard methods. The perpetuity growth method treats the final year cash flow as growing forever at a modest rate and capitalises it. The exit multiple method assumes the business is sold at the end of the forecast at a multiple similar to where comparable companies trade.

Both should be run, and each used to sanity check the other. Back out the growth rate implied by your exit multiple, or the multiple implied by your growth rate, and if either is indefensible the terminal value is wrong regardless of how careful the explicit forecast was.

The most common error is inconsistency between the terminal cash flow and the growth assumed. Growth requires reinvestment, so a terminal year with capex equal to depreciation and no working capital investment cannot also grow, and assuming both creates value out of nothing.