<#-- Rebranding: Header Logo--> <#-- Rebranding: Footer Logo-->
  1. DCF Analysis: The Forecast Period & Forecasting Revenue Growth
  2. DCF Analysis: Forecasting Free Cash Flows
  3. DCF Analysis: Calculating the Discount Rate
  4. DCF Analysis: Coming Up with a Fair Value
  5. DCF Analysis: Pros & Cons of DCF
  6. DCF Analysis: Conclusion

The first step in the DCF analysis process is to determine how far out into the future you should project cash flow.

The Forecast Period

For our example, we’ll assume that ACME Corp. is growing faster than the gross domestic product (GDP) expansion of the economy, and it will be able to earn returns on new investments that are greater than its cost of capital during this excessive return period. Since most companies can’t grow faster than the economy for long, we have to estimate how far into the future this period of excess returns will last (it’s common practice to use the excess return period as the forecast period).

To do so, we’ll make an educated guess based on the company’s competitive and market position, with the assumption that all companies settle into maturity and slower growth. Even though we’re using the excess returns period in our example, it’s important to note that you could also use DCF analysis to value a company that’s growing slower than the economy.

Here are some general guidelines to use when determining a company’s excess return period or forecast period, based on the company’s competitive position:


Company’s Competitive Position

Excess Returns/Forecast Period

Slow-growing; operates in a highly competitive, low-margin industry

1 Year

Solid company; has advantages such as strong marketing channels, brand recognition and/or regulatory advantage

5 Years

Outstanding growth; operates with high barriers to entry, dominant market position or prospects

10 Years


For our example, we’ll assume that ACME Corp. has strong marketing channels, solid brand recognition and a reasonable competitive position. But – even though there’s enough demand to support five years of growth – we anticipate the market will be saturated after that point. As such, we’ll project our cash flows over the next five years of business.


Revenue Growth Rate

Now that we’ve decided on a five-year forecast, we need to estimate the company’s free cash flow growth over that period. We start by forecasting revenue growth.

As we make revenue projections, we need to think about what ACME Corp. – and the industry – could look like as they evolve over the next five years. It’s important to consider such factors as whether the company’s market is expanding or contracting, its market share numbers, whether there are any new products driving sales and if pricing changes are anticipated.

Because this is a lot of guesswork, it can be helpful to consider more than one scenario. As such, we’ll calculate two different revenue growth models: one that’s optimistic, and says the company will continue to grow at a rate of 20% per year. The other profile errs on the side of caution, and assumes 20% growth during the first two years, 15% growth for the next two years, and 10% growth in Year 5. Assuming present annual revenues of $100 million, our forecast revenue growth profiles will look like this:



Current Year

Year 1

Year 2

Year 3

Year 4

Year 5

Optimistic Revenue Growth













Conservative Revenue Growth















Now that we have a forecast period and revenue growth forecasts, the next step is to estimate the free cash flow generated over the forecast period.

DCF Analysis: Forecasting Free Cash Flows
Related Articles
  1. Small Business

    How Does Tumblr Make Money?

    Tumblr is a popular blogging website that was acquired by Verizon in a nearly $4.5 billion deal that merged Yahoo and AOL in June 2017.
  2. Trading

    Forex Trading: A Beginner's Guide

    Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or commerce.
  3. Investing

    Trading mutual funds for beginners

    Learn the basics about mutual funds, including the types of investment strategies available, types of funds, and the different fees funds may charge.
  4. Trading

    Few Reasons to Own J. C. Penney Stock

    J. C. Penney is unlikely to follow Sears into bankruptcy, but the stock could trade at multi-decade lows for many years.
  5. Investing

    How to Calculate the Equity Risk Premium in Excel

    It is fairly straightforward to calculate the equity risk premium for a security using Microsoft Excel; you can even find out how to estimate the expected return.
  6. Investing

    Monsanto's Main Competitors

    Monsanto Company has two main operating divisions and main competitors within each sector, including The Mosaic Company, Agrium and Dow Chemical.
  7. Trading

    How to Use Volume to Improve Your Trading

    Volume is a simple yet powerful way for traders and investors and traders to increase profits and minimize risks.
  8. Investing

    The Difference Between Drawdown and Disbursement

    In finance, both drawdown and disbursement have multiple meanings. It's important to know which represent transfers of funds between sources.
Trading Center