Final answer:
To calculate a company's valuation, adding the present value of the terminal value to the present values of expected future cash flows is required. This process utilizes the concept of present discounted value, which discounts future amounts to their present value equivalent using a specific interest rate.
Step-by-step explanation:
The question pertains to determining the terminal or residual value in financial analysis, usually as part of a present value calculation or company valuation. When you assume a company will continue forever, you use the terminal value. On the other hand, a residual value is used when you assume the company will be disposed of. The answer to this question is to add the present value of the terminal value to the present values of the company's expected future cash flows calculated at the given discount rate to arrive at the overall company valuation.
In practice, calculating the present value involves discounting future amounts at a specific interest rate to determine their equivalent present value. This interest rate reflects the time value of money, indicating a preference for money available now rather than later. Such calculations are fundamental in financial decisions, including investments in physical capital, government infrastructure decisions, and evaluating future benefits such as long-term lottery payments.