I have a question: If I am investing in a business (as opposed to a project with a finite life), why would I include an expected exit price? This further step changes the metrics of the initial yield, by also imagining the exit yield.
Surely, if I’m buying a business, and if it’s a good business, I’m happy to pay for the PV of the annuity-income, as discounted by (1 + WACC)^ -n for a CF-series (or capitalised by WACC in perpetuity). Now, if I’m also buying the land, there’s an opportunity cost of rental-yield, so I understand including a discounted FV for that scenario; but why otherwise include an ‘exit-value’ that is in fact, only a fictitious expectation: unless there’s an actual signed contract at time zero?
Where’s the measured value from an actual cash-flow?
For surely Terminal-Value is the steady-state value towards infinity; and not the ‘exit-value’?
It seems like the old NPV calc for a business, has evolved in a Bond-like fashion to a TTM exit like a financial instrument … from
NPV = (NOI)(1+(1/WACC)) - Original Cost
(where if you set the NPV equal to Zero, you could find the amount to pay no more than, at the IRR), to now, project-like, including an expected exit-value, plus maybe a Real Options Value (+/-).
Is this evolving valuation process practice, becoming un-real … a financialisation of ‘everything’ … inflating expectations … increasing Debt to Assets … and unnecessarily so?
Thanking you, in advance …