What is typically the duration of the projection period in a DCF analysis?

In a discounted cash flow (DCF) analysis, the projection period is typically set between 5 to 10 years. This duration strikes a balance between providing a reasonable forecast of a company's cash flows while ensuring that estimations remain credible and manageable.

A projection period of 5 to 10 years allows analysts to capture detailed financial performance and growth expectations for the business, as shorter periods—like 1 to 3 years—may not provide sufficient time to assess the company’s performance through different phases of business cycles. On the other hand, extending the projection period to 10 to 15 years can introduce greater uncertainty, making it more challenging to predict future cash flows accurately due to changing market conditions, competitive landscapes, and other unforeseeable variables.

Therefore, the selection of a 5 to 10-year projection period is commonplace in practice, as it provides a mix of realism and analytical rigor necessary for effective cash flow assessments.