Forecast Period (finance)

Forecast Period (finance)

In finance, the forecast period is the time period in which the individual yearly cash flows are input to the discounted cash flow formula. Cash flows after the forecast period can only be represented by a fixed number such as the compound annual growth rate. 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 greater than its cost of capital. 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) or negative (bankruptcy). This method is mostly used by investors, using venture capital for example, planning on a positive exit.