What is the typical horizon for projecting FCF in a DCF?

• A. 1-2 years
• B. 3-5 years
• C. 5-10 years
• D. 20-30 years

Answer: (C)

In a DCF valuation, you project free cash flow for a finite period because forecast accuracy falls off quickly the farther you look ahead. The five- to ten-year window is a practical balance: it’s long enough to model meaningful strategic moves, capital expenditure, working capital needs, and growth trends, yet short enough that your assumptions remain credible.

After this explicit forecast, you determine the terminal value to capture all cash flows beyond the horizon, typically using a perpetual growth rate or an exit multiple. If you forecast for only one or two years, you miss how the business evolves and misses important shifts in margins or investment needs. If you stretch out to twenty or thirty years, the projections become highly speculative and the terminal value tends to dominate, reducing reliability.

For mature, steady businesses, a horizon around five to ten years is standard, which is why that range is considered the best answer.