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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

An analyst values an operating toll road using a discounted cash flow approach. Which adjustment to the valuation inputs is most appropriate when the concession agreement ends in 25 years with no residual value?

The analyst should discount only the 25 years of expected cash flows and include no terminal value. The concession ends with no residual value, so no cash flows exist afterward. Adding a perpetuity or replacement-cost terminal value would overstate the toll road's value.

  1. AAdd a perpetuity terminal value after year 25
  2. BDiscount only 25 years of cash flows and include no terminal valueCorrect
  3. CUse the asset's replacement cost as the terminal value

Explanation

A concession that reverts to the grantor with no residual value means cash flows stop after year 25, so only those cash flows are discounted. A perpetuity or replacement-cost terminal value would overstate value.

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