Corporate Finance - IRR Calc
When LBO modeling for a private equity fund, you typically use an exit mulitple of EBITDA / revenue / some industry metric for the terminal value to calculate the cash inflows for the IRR calc.
For a corporatation, which isn't in the business of flipping companies, how is the terminal value cash flow calculated to develop acquisition IRR? If using a perpetual growth method, what discount rate do you use? Company WACC?
Depends but in Asset intensive investments like Power & Midstream it is the operating term of the plant (warrantee terms), or PPA lives In Gas & Oil E&P - the term of production curve (Depletion curve).
In power service business, i have used the length of the contracts and add about 5 more years with some assumptions around the contract extensions (in general the discrete period is about 15 yrs.). If there is major machinery or term debt, then the forecast lives can be a general indicator
Using an Exit multiple or Terminal value function boosts IRR more that assuming a discrete period CF. The discount rate is usally a project (risk) adjust WACC.
What about the acquisition of a services / consulting business that should continue for an undefined period?
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