What is usually the time frame for projecting free cash flows in a discounted cash flow analysis?

In a discounted cash flow analysis, projecting free cash flows typically occurs over a period of 5-10 years. This time frame allows analysts to capture a significant portion of the business's growth trajectory while also balancing the uncertainty that comes with forecasting further into the future. A projection period of 5 to 10 years provides enough time to incorporate realistic expectations about changes in revenue, operating expenses, capital expenditures, and working capital needs, which can be particularly important for assessing the value of a leveraged company.

If projections are made for too short a time frame, such as 1-3 years, they may not adequately reflect the company's potential growth or changes in its operating environment. Conversely, a projection period extending beyond 10 years may introduce excessive uncertainty, as longer-term forecasts can become less reliable due to changes in market conditions, competitive landscape shifts, and other unforeseen factors. Thus, the 5-10 year window strikes a balance that helps produce a more accurate valuation of a business when using discounted cash flow analysis.