Why is initial investment not considered for valuing enterprise?



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you consider terminal value for valuing enterprise then why not initial investment

1 Answer(s)


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Terminal value is the future value of the businesses operations - this value differs from business to business and hence affects the quality of cash flows.

No matter how much or how little initial investment was made, all of it is manifested in the operational cash flows of the company. Meaning the cash flows capture whatever value is provided by the initial investment. Hence we don't take into account the initial investment.

For example, If company A had Rs.1 crore in initial investment and 30% margins every year; company B had Rs. 5 crores in initial investment and 10% margins every year; by taking into account the initial investment company B will be valued better as a business - but obviously that is not correct.

Hope this makes sense? Happy to setup a call if you need to discuss.