When is it appropriate to use a longer projection period in DCF analysis?

Using a longer projection period in DCF analysis is most appropriate for companies operating in stable industries with predictable cash flows. In such cases, the stability and predictability of cash flows allow analysts to extend the projection period with greater confidence in the accuracy of the forecast. These companies often have established historical data that reflect consistent growth patterns, making it reasonable to expect that those trends will continue over an extended timeframe.

This longer projection period can capture the full economic cycle and provide a more comprehensive view of the company’s potential, allowing the analyst to understand its long-term value more effectively.

In contrast, startups in volatile markets typically experience high levels of uncertainty, which can make long-term projections less reliable. When cash flows are highly uncertain, a shorter projection period is safer, as it acknowledges the inherent risks involved. Similarly, projects with only short-term benefits do not justify a longer projection as the focus is inherently limited to the near term. Therefore, the most fitting application for an extended projection period is within mature companies operating in stable and predictable environments.