What is the meaning of the term 'projection period' in DCF?

The term 'projection period' in a discounted cash flow (DCF) analysis refers specifically to the duration for which cash flows are estimated. This period is crucial because it establishes the time frame over which future cash inflows and outflows are forecasted, allowing analysts to assess a company's or asset's financial performance over that time. By projecting cash flows, analysts can use these figures to determine the present value, which is essential in valuing investments.

This period usually spans several years, depending on the stability and predictability of the cash flows, and often reflects the company’s growth phase before transitioning to a terminal value calculation. In summary, the projection period is integral to the valuation process, providing the framework for forecasting performance and ultimately influencing investment decisions.