In corporate finance, in the context of discounted cash flow valuation, the forecast period is the time period during which individual yearly cash flows are input to the valuation-formula. Cash flows after the forecast period are represented by a fixed number, the "terminal value", determined using assumptions relating to the sustainable

compound annual growth rate Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some ele ...

or exit multiple. There are no fixed rules for determining the duration of the forecast period. However, choosing a forecast period of 10 years, for example, will not be meaningful when individual cash flows can only reasonably be modeled for four years; see Cashflow forecast. The number of forecasting years is therefore to be limited by the "meaningfulness" of the individual yearly cash flows ahead. Addressing this, there are three typical methods of determining the forecast period. #Based on company positioning: The forecast period corresponds to the years where an

excess return Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index. An alpha of 1% means the investment's return on investment over a selected period of time was 1% better than the ...

is achievable. In the years chosen the company should expect to generate a return on new investments greater than its cost of capital. This will be based on its expected competitiveness, coupled with known barriers to entry. See: Porter's five forces, a well known tool for analyzing the competition of a business; and for discussion re the economic argument here. #Based on exit strategy: The number of years after which an "exit" is planned. An exit can either be positive (merger, acquisition,

initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...

) or negative ( bankruptcy). This method is typically used by investors in

venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...

and

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...

, planning a positive exit. See: ; . #Based on market characteristics: Determine a forecast period by choosing a number of years based on the characteristics of the market. Companies in established and well known markets are better suited towards longer forecasting periods than those opening up a new market, or startups.

See also