What time horizons are useful when forecasting cash flows?

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  • #35720
    Chris
    Keymaster

    For how many years would you typically build financial models and forecasts the business i.e. cash flows? Does this depend on the nature of the business (i.e. start up vs. mature company) and its industry (e.g. fintech vs. traditional banking)?

    #37177
    Rohit Singh
    Participant

    There are two general methods:
    (1) Where the company doesn’t have defined life ( most of the businesseses): Use 3-5 years for high growth(Hg), next 3-5 years for medium growth (Mg) and then project with a sustainable growth rate until infinity ( using gordon growth model).Practically 3-8 years is only projected and infinity is covered using gordon growth formula.

    (2) Companies having defined life- like power project or road toll project- these generally have 15-30 years of defined life- yes defined life as govt signs definite agreement-The analyst needs to project for the whole of this 30 years and do Project IRR, equity IRR, NPV analysis. One should not project beyond this 30 years until unless the infrastructure contract defines very clearly what would happen after 30 years.

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