In finance, the forecast period is the time period in which the individual yearly cash flow

Cash flow

Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...

s are input to the discounted cash flow

Discounted cash flow

In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...

 formula. Cash flows after the forecast period can only be represented by a fixed number such as the compound annual growth rate

Compound annual growth rate

Compound annual growth rate is a business and investing specific term for the smoothed annualized gain of an investment over a given time period...

. There are no fixed rules for determining the duration of the forecast period. This article covers three methods of determining the forecast period.

No set maximum

Determine a forecast period by choosing a number of years with excessive return. In the years chosen the company should plan to generate a return on new investments

Rate of return

In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...

 greater than its cost of capital

Cost of capital

The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...

. This can be based on factors such as comparing the company’s competitiveness with its competitors.

Predetermined maximum, based on exit strategy

Determine a forecast period by choosing a number of years after which an exit is planned. A exit can either be positive (merger, acquisition, initial public offering

Initial public offering

An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...

) or negative (bankruptcy

Bankruptcy

Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

). This method is mostly used by investors, using venture capital

Venture capital

Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

for example, planning on a positive exit.

Predetermined maximum, based on market

Determine a forecast period by choosing a number of years based on characteristics of the market. Companies in established and well known market are better suited towards longer forecasting periods then companies opening up a new market.

Summary

The number of forecasting years is always limited by the availability of individual yearly cash flows. Choosing a forecast period of 10 years is not meaningful when individual cash flows can only be determined for four years.