The terminal value under each scenario is the expected earnings multiplied by the P/E ratio. The expected terminal value is the weighted average of the three scenarios (all in $ million):
Scenario 1: Terminal value = $20 × 10 = $200
Scenario 2: Terminal value = $7 × 6 = $42
Scenario 3: terminal value = $0
Expected terminal value = ($200 + $42 + $0) / 3 = $80.67
The expected terminal value is then discounted at the IRR rate to arrive at the post-money (POST) valuation:
POST = FV / (1 + r)N = $80.67 / (1 + 0.25)4 = $33.04
The pre-money (PRE) valuation is the post-money valuation less the investor’s initial investment:
PRE = POST − INV = $33.04 − $5.0 = $28.04
