What constitutes terminal cash flow?

Terminal cash flow refers to the cash flows that occur at the end of a project’s life. This includes the cash that is generated when the project concludes, which can encompass the salvage value of any assets, recovery of working capital, and any other terminal cash inflows or outflows that might arise when the project is finished. It is a crucial component in the investment appraisal process, as it contributes to the total value generated by the project.

This final cash flow captures all aspects of cash movements that take place right at the project's closure, making it particularly important for evaluating the overall profitability and feasibility of long-term investments. Additionally, it reflects the net cash position after fully accounting for any disposal costs, which are not considered in annual operating cash flows but are significant at the project’s end.

Understanding terminal cash flow is essential for financial analysts as it has a direct impact on the net present value (NPV) calculations and overall decision-making regarding project investments.